Troubled by high inflation readings and sharp messages from Federal Reserve officials about the need to raise interest rates, bond prices have fallen this year at a pace investors have rarely seen. In the first quarter, the Bloomberg US Government Bond Index returned minus 5.5%, its worst performance since 1980. This month, it has declined further by 2.4%.
As of Thursday’s close, the yield on the benchmark 10-year US Treasury note stood at 2.808%, its highest level since the end of 2018 and 1.496% at the end of the previous year. Yields increase when prices fall.
Rising Treasury yields are in many ways a reflection of a stronger economy. A big reason why many investors expect high inflation to continue in the near term is because households are cash-strapped and eager to spend their money on travel and leisure activities as they recover from the COVID-19 pandemic. worry less about. The labor market is also, by some measures, the tightest in decades, giving workers the advantage of demanding better wages and the belief that they can always find a different job if they lose their current job.
These forces, however, are precisely why the Fed is trying to push bond yields forward by promising a sharper series of interest rate hikes — an effort whose urgency has been tempered by a moderately encouraging inflation report last week. Many investors are saying they expect bond prices to continue to fall this year, and some argue that it won’t be clear what the central bank’s message is going to be until stock prices get more serious. does not decline.
“We are coming off one of the worst quarters in history … and the big bear market in bonds continues,” said Thanos Bardas, global co-head of Investment Grade and a senior portfolio manager at Neuberger Berman.
The Treasury yield largely reflects expectations for short-term rates over the life of a bond. They in turn set a floor on the cost of borrowing in the economy. The Fed, now, wants to increase borrowing costs to slow consumer demand and tame inflation — and it’s succeeding in at least the first goals, after the average 30-year mortgage climb last week to 2011. Up to 5% for the first time.
Analysts said rising returns are tough for investors, but there are some glimmers of hope in the latest inflation report.
Overall, the consumer-price index rose 1.2% in March compared to the previous month, the Labor Department said, bringing year-on-year inflation to another 40-year high of 8.5 percent. Still, core prices — excluding volatile food and energy categories — rose a more modest 0.3%, their smallest monthly gain since September.
Core inflation, used car and truck prices fell by 3.8% – a sign that some of the inflation component over the past year may return to Earth this year as consumers change their spending patterns and businesses Solve supply-chain problems. ,
Treasury yields fell after the data was released. But they were back again by the end of the week, with bond investors saying a report was not enough to comfort them.
“It doesn’t change anything,” said Zhiwei Ren, portfolio manager at Penn Mutual Asset Management.
He said investors already expect inflation to peak in March. But it is still likely to plateau well above the Fed’s 2% annual target, prompting the central bank to raise interest rates higher than what investors are already expecting.
One hope of some bond investors is that rising consumer prices, coupled with higher borrowing costs, may slow consumer demand in relatively short order. In that case, the Fed could tighten monetary policy, but officials would not feel the need to raise their rate forecasts further, allowing bond yields to stabilize.
For his part, Mr. Bardas said his team has recently adjusted portfolios so that their vulnerability to rising interest rates is roughly the same as the bond indexes they track – which tend to overestimate the index as yields rise. There is a change from their previous posture designed to improve.
Yields have risen enough, he said, that it seemed appropriate to take a more wait-and-see approach. Yet he was hardly celebrating after the inflation report, saying he would need to see consistent readings of 0.2% monthly core inflation before he began to feel more confident about the outlook. Other fund managers, such as Mr. Rain, are still positioned for higher returns.
He said the final destination of interest rates is notoriously difficult to predict, but a sign the Fed may need to do more than currently expected is that stocks, as a whole, have experienced only modest declines, according to the S&P 500. has declined by 7.8%. -to date.
Right now interest rate derivatives show that investors expect the Fed to raise its benchmark federal-funds rate from its current level of between 0.25% and 0.5% to 3% next year.
If the market starts pricing in a 3.5% fed-funds rate and the stock falls 10%, that could suggest the Fed will stop at 3.5%. But if the stock moves hard, “it tells you” [Fed officials] More will have to be done,” Mr. Ren said.
This story has been published without modification to the text from a wire agency feed