“So what is causing these sophisticated bond traders to get it wrong in your opinion?”
Great question. I can only speculate on their blind spot(s):
1) very, very few professional traders working today were adults during the last period of great inflation, the decade between 1972-1981. Almost universally all of them were raised in the period of great disinflation between 1985-2020. They have no comprehension of what causes inflation or how inflation can become entrenched into spiralling wage expectations and the perpetual debasement of currency valuations through consumer spending habits and expectations.
2) traders see 8-9% CPI inflation and know from their textbooks in college Econ classes that you need a fed funds rate 1-2% above this level to tame inflation permanently, as accomplished by Paul Volcker. This suggests we need a 10% Fed funds rate and a corresponding ten year treasury of say 12-15%. This causes panic amongst traders. Inputting these assumptions causes equity and bond markets to implode. Consequently, a collective willful ignorance ensues to deliberately assume this risk away, for the benefit of their own livelihoods.
Under the Radar