The boltU.S. investors’ recent government bonds in recent days reflect the gloomy outlook for the markets following the severe inflation report from Friday.
After the shock of data showing that consumer price rises are widening, bonds fell sharply on Friday and continued to do so on Mondays and Tuesdays, causing their yields – which rise as prices fall – to rise to their highest level in more than a decade.
Towards Friday, there were widespread hopes on Wall Street that the applause for HaThe GH has finally reached its peak this year, having taken enough steps to tighten financial conditions so that consumer demand and inflation can gradually fall to more comfortable levels. Which are currently rising at a rate several times faster than the central bank’s target, 2% per year.
“There is definitely an element of surrender” in the trend of the bond market, said Thomas Simmons, senior vice president and money markets economist at Jeffries Bank. “There is general recognition that Friday’s data was a significant message.”
Yields on government bonds largely reflect investors’ expectations of the short-term interest rate over the life of a bond, and these in turn set a bottom for the cost of lending in the economy. On Tuesday, the yield on 10-year Treasury bonds rose to about 3.5%. The highest level since April 2011.
Yields have risen 0.51 percentage points in the last five trading rounds, the fastest rise in such a short period of time since October 2008.
Price increases have intensified – across the economy
The yield on two-year Treasury bonds, which is more sensitive to the monetary policy forecast for the near term, closed at 3.435%, the highest level since November 2017 and up from 2.815% last Thursday.
Short-term yields were boosted late Monday after the Wall Street Journal reported that the Fed could raise short-term interest rates by 0.75% in its decision on Wednesday this week – an aggressive move the bank has not taken since 1994, and a 0.5% escalation from the central bank. In early May.
This change in policy happened after the release of consumer price index data on Friday, which could not have been more depressing for investors and analysts. Not only did inflation reach a 40-year high, just as many investors thought it would start to fall, price increases occurred across the entire economy, in every area – from housing to child footwear.
Another blow to U.S. government bonds came when data released exactly an hour and a half after the Consumer Price Index report showed that consumer expectations about long-term inflation have risen to the highest level since 2008. This has weakened the claim that somewhat anchored inflation expectations can help ensure real inflation does not Will cost too much.
“The reality is that we are not seeing enough signs that the inflation rate is slowing down,” said Daniela Mardrovichi, co-director of the Permanent Income Department at Macquarie Asset Management. The result, she said, is that investors have been required to update and raise their forecast to the level of “neutral interest rates” – one that neither encourages nor slows down economic growth. This, in turn, raised government bond yields both short-term and long-term. The two-year bond yield surpassed the government’s ten-year yield in the post-trading hours on Monday, during what was considered a warning sign regarding the future of the economy.
Some people think that the worst is already behind the bond market
U.S. government bond yields play an important role in both the economy and the financial markets. Their rise this year has helped raise the interest rate on her mortgage at a fixed rate for 30 years above 5% for the first time in more than a decade. They also dragged down stock prices and increased the cost of replacing bonds with a stock component. The blow was particularly severe for relatively unprofitable companies, which are priced according to their long-term earnings potential.
Corporate bonds have suffered heavy losses this year following a drop in their prices, and major bond indices are clearly on the way to their worst year ever.
As of Monday, the Bloomberg Combined Bond Index – which consists mostly of Treasury bonds, high-ranking corporate bonds and mortgage-backed bonds – gave a negative annual return of 12%. The last time such a return yielded in the same period was in 1984, when it stood at minus 2.9%.
Many investors and analysts nonetheless believe that the worst of the bond market has already occurred, pointing to the slowdown in housing demand and the slump in consumer confidence as evidence that the impending rise in interest rates is already doing its job in cooling the economy.
And yet, others warn that poor bond performance can even create negative momentum of their own.
“Perhaps the biggest risk with rising interest rates is that investors will simply decide to sell the bonds they hold,” said Donald Allenberger, senior director of fixed income portfolios at Federated Hermes. “And they do not provide much income, we may see interest rates rise even more, because Wall Street traders do not have the ability or desire to store bonds that no one wants.”