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This episode of Odd Lots explores why U.S. Treasuries are perceived as risky again, featuring guest Carolyn Fluger, associate professor at the University of Chicago Harris School of Public Policy. The hosts and guest examine how bond market volatility relates to monetary policy, central bank credibility, and shifting correlations between bonds and stocks. They discuss how the market's perceived policy reaction function changes over time, why treasury bond risk has climbed since 2000, and how broader factors like fiscal deficits, geopolitical power, and global hegemony intersect with government borrowing rates.
Hosts introduce the episode and run a series of sponsor ads before launching into the main discussion.
Joe and Tracy welcome listeners to the main segment of the Odd Lots podcast.
Joe and Tracy introduce their guest, associate professor Carolyn Fluger, and preview her research focus.
Fluger explains what a policy reaction function is and why it matters for bond markets and the real economy.
Fluger details the two main methodologies used to estimate how markets incorporate Fed policy expectations.
Fluger traces the evolution of Treasury bond risk, highlighting the shift from inflation‑linked to nominal risk over time.
The conversation turns to the recent increase in Treasury bond risk and its impact on yields and portfolio allocation.
Fluger discusses how Fed policy and market expectations influence the bond‑like quality of Treasuries.
The hosts explore how geopolitical events and military power affect the perceived safety of Treasury bonds.
Joe and Tracy conclude the episode, recap key takeaways, and provide closing remarks and credits.
Hosts guide listeners to subscribe via Apple Podcasts and Bloomberg channel.
Delta promotes its business credit card, offering bonus miles for new sign‑ups.
The hosts discuss the 30-year treasury rate hitting 5.592 percent, marking its highest level since 2002 amidst extraordinary speed and scale.
Defining Policy Reactioninsight
The guest defines the policy reaction function and gives a numerical example of how expected inflation maps to expected policy rates.
Forward-Looking Data Approachstrategy
The guest explains how she and her co-authors use blue-chip survey forecasts rather than backward-looking historical data to study policy rules.
Nominal vs Real Bondsinsight
The guest explains the difference between holding regular nominal bonds versus inflation-indexed TIPS regarding inflation exposure.
Explaining Yield Increasesinsight
The speakers analyze the drivers behind the 10-year yield trends, noting that the majority of recent yield increases are tied to bonds becoming more stock-like.
Geopolitics and Hegemonyinsight
The guest shares research on how deep bond markets, military power, and financial capacity interlock to support global superpowers and hegemonic stability.
The host notes that the yield on the Chinese 30-year bond is sitting at 2 percent, highlighting a massive spread compared to U.S. yields.
“Most simply, that's what markets or observers more broadly expect the Fed to do in response to economic conditions.”
“Treasury bonds were not always safe historically. There were periods, especially during the 70s, 80s and 90s, when treasury bonds were viewed as quite risky.”
“So pre 2000 treasury bonds were actually quite stock-like, if you will, in their correlation with the bond market.”
“So we call that the learning from actions channel.”
“And the perceived reaction function that we saw at that time was extremely flat.”
“But sometimes what matters most is being ready for what you never saw coming.”
“The next opportunity? The next investment? The next move?”
We all know that US Treasury yields have been surging, alongside bond yields all around the world. So what explains the selloff and does this mean that bonds are becoming fundamentally riskier? What happens if investors can no longer hedge stocks with government debt? And how do expectations of the Federal Reserve's "reaction function" fit in? In this episode, we speak with Carolin Pflueger, associate professor at the University of Chicago and a resident scholar at the Chicago Fed Bank, about her work on the bond market and central banks. We discuss why bonds have become more stock-like, what that means for yields, and the role of the Fed's credibility in making bonds “bond-like” again. See Odd Lots Live in Chicago! https://events.bloombergevents.com/event/OddLotsLiveChicago/summary See omnystudio.com/listener https://omnystudio.com/listener for privacy information.
9,388 words · 9 speakers
Speaker names marked are inferred from speaking time and the show’s known hosts — they are not voice-verified.
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