The trouble with the new normal is that investors still don't believe in it

financialpost.com:

In 2008, the runaway inflation of the 1980s and the painful medicine of record high rates required to subdue it were still relatively fresh in people’s minds.

At that time, had you asked anyone what would be the most likely result of keeping rates near zero for more than a decade, their most likely response would have been runaway inflation. And yet inflation remained strangely subdued. Most experts say this unexpected result was largely attributable to a relatively benign geopolitical climate and a related push towards global outsourcing.

This led to the notion of a “new normal” in which inflation was permanently expunged. This false sense of comfort caused central banks and investors alike to be caught off guard in late 2021 when they realized inflation had not been permanently vanquished, but had been merely hibernating.

These sentiments were evident in bond markets. After rates were slashed to zero during the global financial crisis, investors were skeptical that they would remain there for long before stoking inflation. Longer-term rates remained well above their short-term counterparts, with the yield on 10-year U.S. Treasuries retaining an average 1.9 percentage-point premium above the Fed funds rate from 2009 to 2020.

However, 13 years of ultra-low rates with no sign of inflation allayed such fears, with the yield spread crossing into negative territory late last year and reaching a low of minus 1.5 per cent in May 2023. Even the rapid acceleration in inflation in late 2021 failed to fully disavow investors of the notion that the era of low inflation had come to an end, with 10-year rates falling below their overnight counterparts.

Equity markets danced to the same tune. Investors were dubious that inflation