What are the key takeaways from this Odd Lots episode?

Key insights include: **Perceived Policy Reaction Function:** Markets learn the Fed's inflation-fighting credibility primarily through actions, not words. Between early 2022 and end of 2023, the market's perceived inflation response coefficient rose from near zero to approximately one — only after the Fed began delivering repeated large rate hikes, not during prior verbal signaling about transitory inflation.; **Bond-Stock Correlation as Risk Gauge:** When Treasury bonds move in the same direction as stocks, they lose their hedging value and investors demand higher yields as compensation. Pfluger estimates roughly one quarter of the 10-year yield decline from the mid-1980s to 2010s resulted from bonds becoming better portfolio hedges, with the recent yield surge largely explained by this correlation reversing.; **Supply Shock vs. Demand Shock Regime:** Pre-2000 recessions were supply-driven, producing stagflation that hurt both stocks and bonds simultaneously. Post-2000 recessions were demand-driven, meaning lower inflation benefited nominal bonds during downturns. Investors should track whether current shocks are supply or demand in origin, as this determines whether bonds will hedge equity portfolios or amplify losses.

What did Carolyn Pfluger discuss on Odd Lots?

Carolyn Pfluger, University of Chicago economist and Chicago Fed visiting scholar, explains how Treasury bonds have shifted from safe-haven assets back toward risky instruments, connecting this transformation to the Fed's perceived policy reaction function, bond-stock correlations, and the historical link between military hegemony and sovereign borrowing costs. Key topics include: **Perceived Policy Reaction Function:** Markets learn the Fed's inflation-fighting credibility primarily through actions, not words. Between early 2022 and end of 2023, the market's perceived inflation response coefficient rose from near zero to approximately one — only after the Fed began delivering repeated large rate hikes, not during prior verbal signaling about transitory inflation.; **Bond-Stock Correlation as Risk Gauge:** When Treasury bonds move in the same direction as stocks, they lose their hedging value and investors demand higher yields as compensation. Pfluger estimates roughly one quarter of the 10-year yield decline from the mid-1980s to 2010s resulted from bonds becoming better portfolio hedges, with the recent yield surge largely explained by this correlation reversing..

How long is this episode of Odd Lots?

This episode is 50 minutes long. SignalCast provides an AI-generated summary so you can get the key insights in about 3 minutes.

Odd Lots

Why Treasuries Became Risky Again

October 5, 2026

50 min episode · 2 min read

Carolyn Pfluger

Episode

50 min

Read time

2 min

Topics

Investing, Fundraising & VC, Science & Discovery

AI-Generated Summary

Published Oct 5, 2026

Key Takeaways

✓Perceived Policy Reaction Function: Markets learn the Fed's inflation-fighting credibility primarily through actions, not words. Between early 2022 and end of 2023, the market's perceived inflation response coefficient rose from near zero to approximately one — only after the Fed began delivering repeated large rate hikes, not during prior verbal signaling about transitory inflation.
✓Bond-Stock Correlation as Risk Gauge: When Treasury bonds move in the same direction as stocks, they lose their hedging value and investors demand higher yields as compensation. Pfluger estimates roughly one quarter of the 10-year yield decline from the mid-1980s to 2010s resulted from bonds becoming better portfolio hedges, with the recent yield surge largely explained by this correlation reversing.
✓Supply Shock vs. Demand Shock Regime: Pre-2000 recessions were supply-driven, producing stagflation that hurt both stocks and bonds simultaneously. Post-2000 recessions were demand-driven, meaning lower inflation benefited nominal bonds during downturns. Investors should track whether current shocks are supply or demand in origin, as this determines whether bonds will hedge equity portfolios or amplify losses.
✓Gradual Monetary Policy Preserves Bond Safety: A more inertial, gradual Fed reaction function — when credibly priced in by markets — keeps bond-stock correlations negative and supports soft landings during supply shocks. The 2021–2022 period combined 1980s-style supply shocks with a more gradual policy response, generating a hybrid outcome distinct from either historical template.
✓Military-Financial Hegemony Compounding: Pfluger's research with Pierre Red of Columbia models how financial and military advantages self-reinforce. Lower sovereign borrowing costs fund military and economic investment, which justifies those lower rates. The US 30-year yield at 5.6% versus China's at 2% represents a 350-basis-point spread that reflects — and potentially accelerates — a shift in this compounding dynamic.

What It Covers

Carolyn Pfluger, University of Chicago economist and Chicago Fed visiting scholar, explains how Treasury bonds have shifted from safe-haven assets back toward risky instruments, connecting this transformation to the Fed's perceived policy reaction function, bond-stock correlations, and the historical link between military hegemony and sovereign borrowing costs.

Key Questions Answered

•Perceived Policy Reaction Function: Markets learn the Fed's inflation-fighting credibility primarily through actions, not words. Between early 2022 and end of 2023, the market's perceived inflation response coefficient rose from near zero to approximately one — only after the Fed began delivering repeated large rate hikes, not during prior verbal signaling about transitory inflation.
•Bond-Stock Correlation as Risk Gauge: When Treasury bonds move in the same direction as stocks, they lose their hedging value and investors demand higher yields as compensation. Pfluger estimates roughly one quarter of the 10-year yield decline from the mid-1980s to 2010s resulted from bonds becoming better portfolio hedges, with the recent yield surge largely explained by this correlation reversing.
•Supply Shock vs. Demand Shock Regime: Pre-2000 recessions were supply-driven, producing stagflation that hurt both stocks and bonds simultaneously. Post-2000 recessions were demand-driven, meaning lower inflation benefited nominal bonds during downturns. Investors should track whether current shocks are supply or demand in origin, as this determines whether bonds will hedge equity portfolios or amplify losses.
•Gradual Monetary Policy Preserves Bond Safety: A more inertial, gradual Fed reaction function — when credibly priced in by markets — keeps bond-stock correlations negative and supports soft landings during supply shocks. The 2021–2022 period combined 1980s-style supply shocks with a more gradual policy response, generating a hybrid outcome distinct from either historical template.
•Military-Financial Hegemony Compounding: Pfluger's research with Pierre Red of Columbia models how financial and military advantages self-reinforce. Lower sovereign borrowing costs fund military and economic investment, which justifies those lower rates. The US 30-year yield at 5.6% versus China's at 2% represents a 350-basis-point spread that reflects — and potentially accelerates — a shift in this compounding dynamic.

Notable Moment

Pfluger notes that in May 2021, when annualized inflation surprised by roughly 6 percentage points, the two-year Treasury yield did not move at all — even forecasters who correctly anticipated high inflation still expected zero interest rates, revealing how completely the Fed's reaction function had been discounted.

Know someone who'd find this useful?

Episode Transcript

00:00:00 Speaker 1: Hey, Odd Lots listeners, the Odd Lots tour continues and our next stop is in Chicago. 00:00:04 Speaker 2: That's right. 00:00:04 Speaker 3: Joe and I will be at the City Winery Chicago on October 15th for a live Odd Lots recording. Tickets are on sale now at Bloomberg.com forward slash Odd Lots. 00:00:15 Speaker 1: And of course, a special thank you to Barclays for supporting Odd Lots Live. 00:00:19 Speaker 3: So that's October 15th at City Winery in Chicago. Get your tickets now. 00:00:26 Speaker 1: Bloomberg Audio Studios. Podcasts. 00:00:30 Speaker 2: Radio. News. 00:00:42 Speaker 3: Hello and welcome to another episode of the Oddbots Podcast. I'm Tracy Alloway. 00:00:46 Speaker 1: And I'm Joe Wiesenthal. 00:00:48 Speaker 3: Joe, we're back in New York. Yeah. But the Jackson Hole episodes continue. 00:00:53 Speaker 1: That's true. You know what, by the way, oh my The 30-year rate, by the way, it's just straight up the last few weeks. But it's right around, as of the time that we're recording this, it's at 5.592. It has now hit the highest level since 2002. Wow. So a few weeks ago, we were looking at the yield curve and saying all these things. Oh, now highest level since 2007. 00:01:16 Speaker 3: Yeah. 00:01:18 Speaker 1: And then it was 2004 was the other year, and now we're getting higher since 2002. It really is both extraordinary speed and scale. 00:01:27 Speaker 2: Yeah. 00:01:27 Speaker 3: And the other thing that happened since Jackson Hole is we had a Fed rate hike. 00:01:31 Speaker 1: We had a Fed rate. 00:01:33 Speaker 3: And yet yields continue to soar. And so there's an open question over whether or not that rate hike is having its intended effect in terms of dampening down financial conditions and things like that. Yeah. Another big thing in the background, I feel like I have to list all these mega trends, but the other big thing is there's been this ongoing debate over Fed's communication style, the new communication framework, what does credibility mean when a central bank is in an inflation-fighting environment and things like that. We have to talk about all of this. Yeah. 00:02:09 Speaker 1: When you said another thing in the backdrop, I was like, which of the many things are you going to choose here? Because you could have said, oh, you know, this is against the backdrop of large deficits, against the backdrop of AI spending and the fact that big hyperscalers are spending it and borrowing at rates that are like the size of like pretty big nations, you could have said, in the backdrop of longstanding questions about U.S. global hegemony and the link between war and the dollar and so forth, et cetera. And so there are many backdrops. There are infinite backdrops. 00:02:46 Speaker 3: I could have gone on for a while, but I chose …

Get the full transcript (7,827 words) + summary by email — free

One-time email with the complete transcript and AI summary of this episode. No account needed.

One email, no spam. We’ll also show you what SignalCast does.

Browse all Odd Lots transcripts →