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The US Treasury
Al Drago / Bloomberg
Treasuries sell off again, after the Federal Reserve’s latest policy-making meeting gave the green light for stronger growth and inflation, and as officials showed little concern about the hike yields.
Yields increased the most for maturities between 5 and 10 years on Thursday; the benchmark 10-year yield climbed more than 10 basis points, or hundredths of a percentage point, to nearly 1.75%, the highest level since January 2020.
Nasdaq Composite
down 1.5% in morning trading as investors discounted future potential growth at a more pronounced pace. He also stimulated the banks, with the
KBW Bank Index
(ticker: BKX) up nearly 4% in midday trading.
At their last meeting, Fed officials decided to keep interest rates close to zero and to continue buying $ 120 billion worth of treasury bills and mortgage-backed securities each month, as planned.
As the central bank tightened its forecast for economic growth and inflation this year and next, the Fed official’s median forecast also called for interest rates to stay close to zero until 2023. according to Bloomberg data, in line with the latest forecasts (although liquidity is often low in this market for dates beyond one year). Other derivative markets have valued rates close to zero until 2023.
This points out that the market’s inflation gauges haven’t risen much in response to the news. Instead, Thursday’s lead was mostly driven by inflation-adjusted, or “real” yields.
In theory, Treasury yields are being driven either by inflation or Fed policy, but neither inflation nor the Fed’s tightening bets appear to play a big role on Thursday. This rise in inflation-adjusted returns may therefore be the result of external factors. One of these is probably the decline in asset managers, which recently distorted the market for short-term treasury bills.
Peter Tchir of Academy Securities wrote in a note on Thursday that the latest move could characterize an attempt to revert “bondholders,” or investors who are making bearish bets on Treasuries in response to a perception of fiscal policy and too lax monetary policy.
But pricing the bond market does not imply a lot of expectations for soaring inflation. Bond market inflation gauges are 2.6% over 5 years and around 2.3% for 10 years or more.
And global demand is likely playing a role as well, both in Thursday’s sell-off and in the longer-term outlook for US bonds. The
Bank of Japan
would consider slightly widening the range in which it allows its long-term bond yields to trade, according to Nikkei, a report that helped push global bond yields higher on Thursday.
The question now is how high yields will rise before investors start to find bonds more attractive. Some strategists have identified the area around 2% as an area in which investors could start to intervene. In fact, there may already be signs of this in the longer-term, higher-yielding parts of the market, as the 30-year yield only rose by half as fast as the 10-year yield on Friday.
And as US growth improves, the dollar is expected to strengthen and yields on treasury bonds eventually rise enough to provide a good return for global investors, as Evercore ISI strategist Dennis DeBusschere points out in a recent note.
This may not be good news for stocks or for the performance of long-term bonds this year. But this is not a disaster for the bond market.
Write to Alexandra Scaggs at [email protected]
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