'The bond market is the dog, stocks are the tail.'

The bond market is the largest, most liquid market in the world. It sets the cost of borrowing for everyone — governments, corporations, and consumers. What happens in bonds ripples into every other asset class.

What the Bond Market Does:

1. Sets Long-Term Rates: The Fed controls short-term rates. The bond market (through supply and demand for bonds) determines long-term rates like the 10-year yield.

2. Prices Expectations: Bond yields embed market expectations about future growth, inflation, and Fed policy. Rising yields often mean expected inflation or growth. Falling yields often mean expected weakness.

3. Establishes the Benchmark: Treasury yields are the 'risk-free rate.' Everything else — corporate bonds, mortgages, equity valuations — is priced relative to Treasuries.

Bond Vigilantes:

Bond investors can override Fed intentions. If the bond market believes the Fed is making a policy error (too easy, risking inflation), it can push long-term yields higher even as the Fed keeps short rates low. This happened in 2023 when the 10Y spiked to 5% despite no Fed hike — bond investors demanded higher yields due to supply concerns and 'higher for longer' expectations.

The Treasury Market's Importance:

Treasuries aren't just investments — they're collateral for the entire financial system. Banks and hedge funds use Treasuries to secure borrowing. When Treasury prices fall (yields rise), collateral values drop, which can trigger margin calls and deleveraging across the system.

This is why Treasury market dysfunction (like September 2019's repo crisis or March 2020's flash crash) forces immediate Fed intervention.