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Roula Khalaf, editor-in-chief of the FT, selects her favourite stories in this weekly newsletter.

One major advantage of the latest wave of market madness is that the safety net fortunately worked.

Stock markets went through a chopping machine earlier this summer, in a shock that left investors and analysts scratching their heads and wondering what had just happened. For those lucky enough to miss it, the short answer is that some weak U.S. economic data provided an excuse to sell, and then some troublesome technicals made things worse, only to have markets return to where they started within days, almost enough. It was a case of classic summertime, illiquidity-scarred market conditions, with a little extra kick.

In the end, it all meant very little, except that fund managers are quick to hit the sell button when they know they’ve been riding a strong rally for months. After all, no one knows exactly how markets will react when the rate-cutting season in the US begins, probably next month.

Experience has made asset managers all a little more cautious. It turns out that stocks go down as well as up — who would have thought? The good news is that investors can now face that challenge with some certainty, that if they’ve balanced their risks, the shock absorbers should be working, because in this case, when stocks took a hit, bond prices shot up.

Now, you could argue (as I have) that bond prices have risen too high and too fast. The jump to the view expressed in bond markets that a disappointing US jobs report could force the Federal Reserve into an emergency rate cut was simply ridiculous. Markets were “shocked,” said Vas Gkionakis, a strategist at Aviva Investors. “Maybe the bond market is right and we are wrong,” he said, but he doubts it.

But beyond the over-excitement, this is a throwback to the good old days, when bonds and stocks moved in opposite directions and the classic formula was to keep 40 percent of a portfolio in bonds and 60 percent in stocks.

This strategy has been scrutinized, read: kicked, because it failed miserably in 2022. Then, rising inflation, which is bad for bond prices in itself, caused central banks to raise interest rates aggressively — also bad for bond prices — while equities also fell hard and fast. Investors had nowhere to hide, because while bonds provide excellent protection against economic contraction, they don’t deal well with inflation, which erodes the real value of the funds returned to investors.

Now, however, the fear is not so much a revival of inflation (fingers crossed), but economic contraction, possibly even caused by tight monetary policy. For investors, these are essentially the moments that bonds are for.

What’s more, bonds are offering some of the highest returns in years. At the height of loose monetary policy, when central banks kept interest rates at or below zero to fuel inflation after the 2008 crisis, many bonds yielded nothing at all. Nearly $18 trillion of debt yielded less than nothing at the end of 2020, Bank of America calculations show, meaning investors were essentially paying to hold it. It’s going to be hard to explain that to the next generation of traders. Let’s just say it was a strange time — but the strangeness is over.

Instead, the benchmark 10-year U.S. Treasury yield is about 3.8 percent. The high of 5 percent yields nearly a year ago may be over, and lingering oddities mean two-year debt still yields a bit more, but that’s still at the high end of what the asset has returned since the financial crisis.

“We believe risks are more skewed toward policy easing than markets are currently pricing in, meaning . . . bonds can offer investors protection from equity market declines,” said Simon Dangoor, head of fixed income macro strategies at Goldman Sachs Asset Management. “With high starting rates, front-end yields have more room to fall compared to the previous cycle,” he added — a nod to the close links between policy rates and short-term yields.

The problem with proclaiming that bonds are back is that we have been here before. Many times. And it has failed repeatedly, because inflation has proven hard to beat.

“Don’t get too excited,” warned GlobalData TS Lombard. “Unless there is a recession or a material weakening of the labor market (not our base case), the Fed’s monetary policy recalibration is likely to be more gradual,” Andrea Cicione and Daniel Von Ahlen wrote in a note. Generally, without a recession, 10-year yields fall before rate-cut cycles begin and then stabilize in a range. If markets give up on the idea of ​​a U.S. recession (yes, again), 10-year yields could rise back to 4 percent or higher, they wrote — a price drop that would hurt as much as it would irritate. “Bonds are not the free ride they used to be,” they said.

That skepticism is justified. There are holes in this safety net. But for now, the simple fact that it held up is a big reason why stocks were able to recover so quickly from their summer dip.

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