The bond market is getting it wrong

The world's central banks appear to be backing away from the ultra-easy interest policies that have dominated the global landscape since the financial crisis of eight years ago.

At least that seems to be the message of the world's bond markets in the last couple weeks.

Long-term interest rates have been rising, most dramatically in Japan, and in other countries where rates have been negative for nearly a year.

Even here in the U.S., amid rising expectations of a rate hike from the Federal Reserve, 10-year Treasury yields climbed as high as 1.73 percent on Tuesday, the highest level since mid-June and about where they remain today.

The Japanese bond market had one of its biggest sell-offs in decades this week driving its 10-year yield almost back into positive territory for the first time in recent memory.

So, why are rates rising?

There are several reasons, not the least of which is that central bankers, beginning with the European Central Bank, have indicated they will do less in the future to hold down long-term interest rates while keeping short-rates steady.

Or, in the Fed's case, outright confusion about it's next move may have induced bond market investors to sell off some Treasuries as a purely defensive move, leading to a steepening yield curve here at home, something we have not seen on each of the bond market's so-called "taper tantrums" that have occurred in the last few years.

Indeed, yield curves have been steepening of late as long-term interest rates have been rising faster than short-term rates.

Historically, that's been a bond market sign that economic growth is accelerating and inflation expectations are advancing.

(Long rates rise with inflation expectations as investors demand higher yields to compensate for the loss of our purchasing power that accompanies accelerating inflation.) Rather oddly, rates are rising but growth and inflation expectations are not.

Instead, it seems more likely that global bond markets are sussing out changes in economic policy around the world.

Interest rates are rising, it seems, in anticipation that federal governments will take over the job of stimulating their economies through fiscal policy measures rather than through lower interest rates alone.

That would mean more government spending, greater bond issuance and higher budget deficits, hence higher bond market interest rates.

And while very few governments appear to have the borrowing capacity to "prime the pump" with fiscal stimulus, that's what the bond market seems to be banking on.

Speaking of banking, a steeper yield curve would help banks earn more profits as they borrow at low rates and lend at higher long-term rates ... if the current trend persists.

And that is the key question. Can world governments engage in active fiscal stimulus, tax reform, regulatory reform and other measures that would alter the seemingly structural deficiencies in the world economy and get growth, slowing many countries despite near zero interest rates, back to historical potential.

I would not be willing to bet on it.

It's the reason, in my opinion, that rates are rising.

But it appears to be based on the false hope of fully functioning governments, both at home and abroad.

It certainly makes enormous sense for central bankers to pass the stimulus baton to federal governments.

If the baton is soon dropped, however, expect interest rates to drop right along with it.

I would dearly love to see enlightened fiscal policy that enhances long-term growth prospects improves productivity and restores normality to the world's bond markets.

It is not yet, however, a bet I'd be willing to make.

Next Wednesday's Fed decision will tell us if it is a bet the Fed is banking on.

Commentary by Ron Insana, a CNBC and MSNBC contributor and the author of four books on Wall Street. Follow him on Twitter @rinsana.

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