Why Treasuries Are ‘Risky’ Again | Odd Lots

Macroeconomic stability and monetary policy transmission depend heavily on the market’s perceived policy reaction function—the predictable way central banks respond to inflation and output data. University of Chicago professor Carolin Pflueger notes that when this function is well-understood, markets effectively assist in dampening financial conditions. Recent years have seen Treasury bonds shift from reliable hedges against stock market volatility to risky assets that move in tandem with equities, driven by supply shocks and changing inflation dynamics. This transformation complicates the Fed’s ability to manage soft landings through gradual policy adjustments. Beyond domestic policy, deep bond markets serve as a foundation for global hegemony, where the ability to borrow cheaply facilitates military and economic dominance. Maintaining this status requires a delicate balance of central bank credibility and fiscal discipline to prevent the self-fulfilling expectations that can trigger shifts in global power dynamics.