Six years ago, the bond market predicted inflation at 0.5%, but it soared to 9.1%. Will this embarrassment repeat in 2026!?

In the bond market, there is a certain number that everyone has used as a benchmark for judging inflation trends over the past decade or so.

In March 2020, this benchmark indicated to the market that the United States would experience sustained deflation over the next five years, with annualized inflation expectations at just 0.5%.

Quite a few people adjusted their portfolios based on this judgment. Pension funds reduced their inflation hedge exposure, bond funds reallocated at the worst possible time, and Federal Reserve officials directly cited “significantly lower market-based inflation expectations” as one of the justifications for monetary easing in the March 2020 FOMC minutes.

Two years later, U.S. inflation reached 9.1%. In hindsight, the actual annualized inflation corresponding to that 0.5% estimate was 4.37%—a deviation of 388 basis points. This number from the bond market was “lying” for two years straight.

Now, this “benchmark” in the bond market is “pretending” again—the latest reading is 2.5%, as if inflation expectations are firmly anchored…

Those who didn’t believe it back then made huge profits over those two years.