The yield on the 10-year Treasury bond, which rises as bond prices fall, jumped to the top of the US trading session and reached 3.008% in the afternoon, as investors prepare for the outcome of this week’s Federal Reserve meeting. It then fell below 3% to 2.995%, according to Tradeweb, from 2.885% on Friday. A report on borrowing costs for everything from home loans to student loans, the yield last closed above 3% in November 2018 and has jumped from 1.496% at the end of last year. Bonds, corporate bonds and government debt prices have fallen this year in response to moves by the Fed to raise interest rates in a bid to curb inflation. The Bloomberg Aggregate US bond index – largely US government bonds, high-yield corporate bonds and mortgage-backed securities – returned minus 9.5% this year on April 29. “It’s been a lot of bruising for two months,” said Nick Hayes, head of total revenue and fixed income division at AXA Investment Managers.
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A pre-purchase primer full of news, trends and ideas. In addition, updated market data. Bond yields largely reflect investors’ expectations for short-term interest rates over the life of a bond. Rising yields are often linked to a strengthening economy, as faster growth and a tighter labor market could lead central banks to fight inflation. In this case, the labor market is extremely tight and inflation has been running at its fastest pace for decades, prompting the Fed to signal a rapid rise in interest rates and trigger a sharp jump in returns that has caused shockwaves in the markets. . “Investors are unlikely to get much relief until inflation worries subside, a wild card when Covid-19 cases in Asia push global supply chains and the war in Ukraine raises commodity prices,” said Zachary Griff. of Wells Fargo. “There is a lot of uncertainty about inflation, monetary policy, geopolitics,” Griffiths said. “Even as the Fed has signaled that they are going to tighten significantly, it still does not seem to be lowering inflation expectations, not in a permanent way.” A reversal of the US government yield curve has been seen as a warning sign of recession for decades and looks set to light up again. WSJ Dion Rabouin explains why an inverted yield curve can be so reliable in predicting a recession and why market observers are talking about it now. Illustration: Ryan Trefes Fed officials raised interest rates by a quarter of a percentage point in March. The latest Fed policy minutes suggest that the central bank could raise interest rates by half a percentage point on Wednesday and begin reducing its $ 9 trillion asset portfolio. That may have surprised some in the market who expected a less aggressive pace, Mr Griffiths said. Ten-year bond yields were well above 3% for most of the last half century, exceeding 15% in the 1980s, according to Ryan ALM & Tradeweb ICE. But in the past decade, they closed the day more than 3% only 64 times, reflecting a period that until recently was characterized by sluggish growth and inflation. While current bond yields remain low by historical standards, they still represent a remarkable recovery from the early days of the Covid-19 pandemic, when 10-year yields fell as much as 0.5%. Investors then saw little reason to worry about interest rate hikes. Not only was the economy in a precarious position, but Fed officials reassessed the way they conducted their monetary policy, pledging to be more cautious about raising interest rates after many years in which inflation had largely remained low. from the annual target of 2%. Yields began to rise in late 2020 in response to the development of effective Covid-19 vaccines and received another boost when Democrats gained full control of Congress, paving the way for more fiscal stimulus. However, the 10-year yield exceeded about 1.75% at the beginning of last year and spent much of 2021 in a gradual decline, even as inflation began to rise. Convinced by Fed officials that inflation was largely temporary, investors, by December, expected only a few percentage point hikes in 2022. Since then, however, bonds have struck as inflation has remained stubbornly high and analysts have continued to raise their expectations for interest rate hikes – raising the bar every time the Treasury priced the most aggressive previous forecasts. As it stands, interest rate derivatives show that investors expect the Fed to raise the key federal interest rate from its current level of between 0.25% and 0.5% to just over 3% next year. This suggests a long journey ahead, in which much of the economy could go wrong, including further cuts in more risky assets such as stocks, forcing the Fed to halt its tightening efforts. Rising yields have already led to sharply higher borrowing costs for consumers – with 30-year mortgage rates rising more than 5% – and contributed to a drop in shares that led the S&P 500 to fall about 13% to annual base. However, many analysts believe that the Fed-fund rate could have to rise well above 3% to contain inflation, suggesting that bond sales could still have a margin. One point such analysts point out is that inflation expectations for the next decade are still high, even with the expected tightening of the Fed. This means that so-called real or inflation-adjusted government yields remain low even by recent historical standards, potentially providing incentives for businesses to borrow and invest despite the sharp rise in nominal yields. The yield on the 10-year Treasury Department-protected inflation – a representative of real yields – stood at about 0.16% on Monday afternoon, according to Tradeweb. This was higher than minus 1.11% at the end of last year, but is still much lower than the level of almost 1.2% reached at the end of 2018. Write to Sam Goldfarb at [email protected] and Heather Gillers at [email protected] Copyright © 2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8
