Bob Elliott Says Bond Market's Assumptions On Growth, Inflation, Monetary Policy Has 'Been Painfully Wrong'

Bob Elliott, co-founder and CEO at Unlimited Funds, believes the bond market has been incorrect over the past year about growth, inflation and monetary policy, and said investors were likely paying more for protection against downside economic moves.

What Happened: “Folks focusing on bond pricing to confirm recession now and cuts coming fast. Saying the “bond market knows." But why take bond market view as likely at all? It’s been painfully wrong for the last year on growth, inflation and monetary policy," Elliott tweeted.

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Risk Premium: The expert tweeted a chart that showed a distribution of outcomes with a big negative risk-premium. Risk premium pertains to the additional return on a particular investment, over and above the risk-free return, to compensate for the risk on the asset.

A negative risk premium comes into play when the rate of return on an investment is below the risk-free return — something prevalent at times when investors are ready to accept the lower returns in return for the safety provided by the instrument during an expected downturn.

Elliott pointed out that there is a sizeable tail risk hedge going on in the bond market as is reflected in the big negative risk-premium for bonds maturing in late 2023 and 2024. Investors are paying for protection in the event of a fast collapse, he noted, and explained that if one is using the bond market pricing to “know better,” it's critical to wrestle with its track record in recent times.

According to Elliott, even if a shift to recession is probable over the course of the rest of the year, bond investors are paying too much for the likelihood/severity of recession. "If you want to de-risk, better to hold cash than long bonds," he said.

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