With stocks at record highs and priced for some nirvanic perfection of future growth reaching escape velocity at some point soon, the question of why bonds keep rallying is vexing to the status quo minders who just can't fathom it. However, as Bloomberg notes, the world’s most actively traded short-term interest-rate futures are signaling the path higher for the Federal Reserve’s benchmark rate won’t be that high.
"When the Fed begins lifting rates is almost not an issue any more,” Stan Jonas, former managing partner of Axiom Management Partners in New York, "The real question is how fast does the Fed increase rates and where do they stop. The market now sees diminished macroeconomic expectations and expects the Fed to ending the upcoming tightening cycle at around 3 percent."
In other words, the bond market believes in the Japanization of America and another lost decade as the new normal low/no growth world slugs along with no escape velocity dreams anytime soon.
Or even more clearly - it's about more than this cycle... the Fed's taper will run its course, the Fed will tighten rates and the economy will slump rapidly meaning the Fed will ease once again (and by then QE will have lost all credibility as anything but an asset inflation machine and along with it - the Fed's credibility)... the tumble in forward rates indicates the markets growing belief that the future growthiness looks very different from the dream priced into stocks...