What role do bonds play towards the end of an economic expansion?

Bonds play a significant role in the context of economic expansions, particularly at the later stages. Typically, as an economic expansion progresses, interest rates may begin to rise in response to increasing inflation and overall economic growth. In this environment, bond yields often start to increase as well, influencing investor behavior.

As bond yields rise, investors may shift their focus from bonds to equities, as stocks generally provide higher returns in a growing economy. This shift can lead bonds to act as leading indicators for commodity prices, reflecting a shift in investor sentiment towards riskier assets. During this phase, higher yields on bonds can suggest that investors expect rising inflation, which often corresponds with upward movements in commodity prices.

Therefore, the notion that bonds typically lead commodities is rooted in the relationship between interest rates, inflation expectations, and investment allocation decisions during periods of economic expansion. This alignment is crucial for understanding how market dynamics shift as economic cycles change.