The bond market is rejecting the mainstream "higher for longer" inflation narrative, as evidenced by the recent rally in Treasuries following hot CPI and PPI reports. This reversal confirms that temporary September technical pressures—such as balance sheet constraints and Treasury drift—have faded, allowing underlying fundamentals to dictate market direction. Current inflation is largely a result of narrow energy shocks and lagging housing data, rather than a broad-based wage-price spiral. Meanwhile, clear signs of demand destruction, including plummeting smartphone shipments and rising credit risks in AI-related debt, point toward a deteriorating economic environment. By flattening the yield curve, the market is effectively separating the Federal Reserve’s potential near-term policy mistakes from the longer-term reality of slowing growth and increased demand for safe, liquid assets.
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