THE WEEK in financial markets has got off to a breezy start, belying the turmoil of last week. Shortly after the New York market opened on March 1st, the S&P 500 index of leading shares was up by a carefree 2%. Europe’s stockmarkets had already followed Asia’s lead in closing sharply up. The mood in Asia was helped by Australia’s central bank, which acted to calm bond-market nerves by announcing it would intervene to buy long-dated government paper. Yields on ten-year Aussie bonds, which had risen quickly since New Year’s Day, fell by some 0.25 percentage points.

It is all in marked contrast to last week, when anxiety about inflation gripped America’s bond market. The steady fall in bond prices since the start of the year had suddenly quickened to a pace that threatened a destabilising rout. During February 25th the benchmark ten-year Treasury spiked above 1.6%, still low by historical standards, but a lot higher than it started the day, or indeed the year. That prompted a big one-day fall in the S&P 500 and a bigger fall in the tech-heavy NASDAQ. Almost as suddenly, fears have receded again, but perhaps not for long.

Much of what has happened is to be expected. Bond prices ought to fall as the economy recovers. The ten-year Treasury is the benchmark bond and is thus a barometer of risk appetite in markets and of economic confidence more broadly. Bond prices move in the opposite direction to confidence; bond yields go in the same direction as confidence. When the outlook for the economy is bleak, as it was last March, yields fall sharply as investors rush to the safety of bonds. As the outlook brightens, bond prices start to fall and yields start to rise again. Bond prices are thus countercyclical most of the time. This feature makes them very attractive diversifiers for equities, the prices of which are more procyclical, moving up and down in tandem with the economic cycle.

Mild inflation is not to be feared. Indeed it is in part changes in the market’s expectations of inflation that drive bond yields down in recessions and up in recoveries. But hopes for a reflation of the economy can quickly spill over into fear of a sustained rise in inflation. The case for this seems stronger than it has for many years. The American economy is recovering quickly. Fiscal transfers have left householders with lots of extra savings. Lockdowns have given rise to pent-up demand. Already there is plenty of fuel for a spending spree when the economy reopens in earnest. And more is on the way. President Joe Biden’s $1.9trn stimulus package is likely to become law this month. A jump in the annual inflation rate seems assured in the coming months, if only because prices were depressed a year ago. Perhaps, then, the strength of spending, as consumers start to move around more freely, might further push it up.

These latent anxieties form the backdrop to last week’s turmoil. Three factors in particular seemed to be at work. First, the market for future short-term rates started to price in interest-rate increases by the Federal Reserve by early 2023, sooner than the Fed had indicated thus far. You can call this the inflation-fear element: if the economy seemingly has this much momentum behind it, can the Fed really hold off from raising rates for very long? And if the Fed tightens sooner, might the peak in interest rates be higher? That would be a big concern for America’s stockmarkets, where high prices relative to future earnings are largely justified by the expectation that interest rates will remain very low for a long time.