The Bond Market's Shaky Foundation

It hasn't mattered much that this bond market was rotten through 2006 and into 2007, because bond market trends were still supportive. But now the fundamentals have turned, and that is putting pressure on all the shakiest parts of the bond market structure.

Those now-negative fundamentals include:

• Interest rate increases from all of the world's major central banks -- except, so far, for the U.S. Federal Reserve.
• Rising food and energy inflation around the world -- almost 7% in the first quarter of 2007 in the U.S.
• The end of the "Wal-Mart inflation bonus" as China, India, Vietnam, etc., shift from exporting deflation to exporting inflation.
• A shift away from the dollar by overseas central banks.

All these are long-term trends, you'll note. They've been in place for months, quarters and, in some cases, years without having much negative effect on the bond market, despite the jeremiads preached by financial market bears. So why did the market panic now?

Because, I'd argue, while bond-market professionals -- with a few exceptions, such as Bill Gross of Pimco, who publicly turned bearish in late spring -- have maintained a "what, me worry?" stance in public, they're actually now deeply worried about the structure of the bond market. And the closer they look, the more rot they see in the structure.