Bonds Surprise With a Summer Rally

In the past 60 days, the consumer price index topped 9% before settling back a bit, the Federal Reserve raised short-term interest rates three-fourths of a percentage point with promises of further hikes, apartment rents kept soaring at double-digit rates, and much more.

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You could sense the fixed-income markets detonating in a bonfire for the ages.

Wrong. Since June, we are instead enjoying a noteworthy bond rally. This makes sense and could persist.

As economic growth slows (or stays negative) and falling oil and other commodity prices filter through the economy, there is no reason for medium- and long-term interest rates to be high. The Fed's statements and rate hikes are intended to blunt inflation. This rally tells us that markets expect consistently lower inflation to arrive sooner rather than later.