What explains the bond bear?

The bond bear is best explained by a restrictive shift in global excess money conditions rather than by energy prices, central-bank hawkishness, fiscal concerns or AI-related capital demand.

• The authors define excess money as the gap between the global money stock needed to support economic activity and the actual stock, measured through the difference between six-month changes in global real narrow money and industrial output.
• Since 1970, global equities have performed strongly on average when this proxy was positive, while they lagged cash returns when it was negative, allowing for reporting lags.
• Government bonds appear more sensitive to changes in excess money than to its level: six-month changes in US 10-year Treasury yields have moved coincidentally with inverted six-month changes in the proxy.
• Global real money growth fell from above to below industrial-output growth between February and August, turning the proxy negative and coinciding with the subsequent rise in bond yields.
• Policy tightening and higher energy costs are expected to weaken real money growth further, although strong September PMI results suggest industrial output may remain resilient in the near term.

Takeaway: The money-output gap should remain negative but may stop deteriorating soon, allowing the proxy's six-month change to return to zero and bond yields to stabilise; the still-negative gap nevertheless signals downside risk for equities.