I was recently asked about the disconnect between the economic signaling of the bond market and that of the stock market. That is, interest rates remaining so low (bond prices so high) suggests that the bond market is signaling anything but robust economic growth going forward — while stocks at record highs may be interpreted as a signal of blue skies to come. The questioner added that in his view “those bond guys are smart” and wondered if perhaps they have it right when all is said and done.

I suggested to him that there’s more than meets the historic eye within today’s bond market. Specifically, the campaign of the U.S. central bank (and, for that matter, that of monetary players globally as well) had been providing a steamroller of a market for treasuries that speculators — regardless of economic prospects — would no way get in front of.

Nate Silver, in his insightful best seller The Signal and the Noise: Why so many predictions fail — but some don’t cites “Goodheart’s Law”, which supports my point:

…. a related doctrine known as “Goodheart’s Law”, after the London School of Economics professor who proposed it, holds that once policymakers begin to target a particular variable, it may begin to lose its value as an economic indicator.

If, amid a Fed that is no longer buying — and, in fact, looking to reduce its treasury and mortgage exposure going forward — bonds regain their predictive prowess… well, if the economy is indeed on a firm growth trajectory, things (for bondholders in particular) could get ugly…