Fixed-income markets are signaling a shift in perceptions of financial stability and raising a caution flag for investors.
It is highly likely that the American and global economies, which have been characterized by insufficient aggregate demand and low inflation over the past two decades, will now be characterized by insufficient aggregate supply, negative supply shocks, geopolitical tensions and higher inflation. All of those factors require different monetary and fiscal policies. This change is showing up in fixed-income markets, which are signaling a shift in perceptions of financial stability and raising a caution flag for investors. These are the consequences of the oil shock, geopolitical stress and the Federal Reserve’s response to inflation, which in turn are causing global investors to question the durability and direction of globalization, growth and appetite for risk.