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Few things have been more consistently profitable for 30+ years than ignoring bond vigilantes and inflation cassandras, as US nominal rates grind slowly lower to their eventual destination below zero.
I suspect bonds can continue to deliver decent returns in nominal terms for several years more as the US rolls out the full suite of financial repression measures already introduced in Japan and Europe.
That said, the pandemic has finally shifted conditions such that the US may finally be able to successfully implement an inflationary policy mix.
The US has failed to pursue a truly expansionary fiscal policy commensurate with its national resources and the unique monetary flexibility accorded by global reserve currency status. COVID19 has helped Congress & America understand how much money they can really spend.
Post COVID, it’s politically preposterous to say “we can’t afford it” to anything on the fiscal wish list. Americans know that if Uncle Sam can hand out $2k checks for all today, why not Medicare For All tomorrow? The usual claimed budgetary constraints are no longer credible.
Congress is going to find it impossible to get off the spending treadmill it is already on. You thought the 2012 “fiscal cliff” was bad- wait until you see what happens if/when Congress tries to walk back the 2020 stimulus. The path of less resistance is simply to keep spending.
At the same time the US is getting pulled onto an ever accelerating fiscal treadmill, it is already locked into perpetually easy monetary policy. The US, like many EM’a before it, is well into the territory of fiscal dominance when it comes to monetary policy.
Needing to roll over trillions of maturing bonds and bills every quarter, the US government faces a yearly financing requirement of the public sector approaching 40% of GDP. Numbers this big don’t work unless rates stay at zero & the Fed keeps expanding its balance sheet.
The Fed will never be able raise interest rates much above zero under these conditions, because doing so will quickly bankrupt the Treasury. Fiscal & monetary policy, never all that independent to begin with, are now joined at the hip.
The US economy has been chronically demand deficient since at least 2000. The proper tool to address this problem has always been fiscal policy. By bursting the shackles of the paradox of thrift, COVID19 may have changed things enough to enable an inflationary boom.
