Frankfurt At the same time, bonds are the drivers of the capital market, a crucial medium of monetary policy and a kind of oracle for the entire economic development. Last week Lael Brainard, Governor of the US Federal Reserve (Fed), spoke plainly: The Fed will fight inflation decisively.
What was particularly important was that she held out the prospect of a rapid reduction in the Fed’s total assets. The central bank is therefore allowing interest rate securities in its portfolio to expire without replacement. The hitherto largest buyer in the US bond market is withdrawing. The news led to a drop in prices, especially for ten-year maturities, and thus, conversely, to an increase in yields.
At the same time, however, the previously existing and widely feared “inversion” of the two-year and ten-year government securities disappeared. If the two-year papers bring in more than the ten-year paper, this is taken as a sign of a recession.
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