In the ever-tumultuous world of finance, bond traders are gleefully wagering that the U.S. economy is teetering on the brink of catastrophe, compelling the Federal Reserve to relax its iron grip on monetary policy to stave off recession. The previous hysteria over soaring inflation has conveniently dissolved, supplanted by grim prognostications that economic expansion will halt unless the central bank slashes interest rates from their zenith of the past two decades.

This wholesale shift in market sentiment is driving one of the most frenzied rallies in the bond market since panic over a banking crisis reared its head in March 2023. So potent is this rally that the yield on two-year Treasury notes plummeted last week by a significant half-percentage point to under 3.9%. This is the first instance it has diverged so dramatically from the Fed’s benchmark rate of about 5.3% since the days of the global financial crisis or the fallout from the dot-com bubble burst.

Traders are fretting that the Fed is lagging, missing the mark on the economy’s transition from a potential soft landing to an inevitable hard crash. Our bond market virtuosos have bungled their rate predictions time and again post-pandemic, swinging wildly between extremes and frequently caught flat-footed when the economy neither spiralled into recession nor when inflation bucked the downtrend. Their latest folly in late 2023 saw bond prices soar on whispers that the Fed was on the cusp of loosening its policy strings, only to face disillusionment as the economy stubbornly clung to robust growth. They appear poised for a repeat performance, hurtling too far, too fast towards what promises to be a rude awakening at the next Fed congregation.

The market mood took a sharp turn following a spate of reports indicating a slowdown in the labour market and a general economic malaise. The Labour Department’s July figures were particularly sobering, revealing a paltry 114,000 new jobs—well shy of the forecasts—and a job growth contraction of 1.5%. The unemployment rate, too, ticked up unexpectedly.

After the Fed opted to hold rates steady, these data intensified fears that the central bank’s reactions are as tardy as they were when they hesitated to hike rates while inflation lingered stubbornly post-pandemic. Such worries are amplified by the more proactive easing measures already underway by central banks in Canada and Europe.

Last week’s economic jitters and Fed dawdling precipitated a sharp nosedive in U.S. stocks. Investor’s nerves were further frayed over the weekend following Berkshire Hathaway’s revelation of a near 50% divestment from Apple in a dramatic second-quarter sell-off. The seismic shifts in the two-year yield over the preceding 10 days have made valuing so-called ‘safe-haven’ assets a formidable challenge, not to mention the even thornier task of assessing riskier investments like stocks.

Investors, seemingly undeterred by the spectre of volatility or the potential for massive policy missteps, are now pencilling in around five quarter-point rate reductions by year’s end. This would signify an unusually aggressive series of half-point cuts at the year’s final trio of meetings, a level of intervention unseen since the pandemonium of the pandemic or the credit crisis. The Treasury rally has nudged the benchmark 10-year yield down to about 3.8%, its lowest ebb since December, buoyed by the stock market’s tumble due to disheartening earnings from tech stalwart Intel, among others.