Week after week, the bond market slump continues to worsen with no clear end in sight.
With central banks around the world aggressively raising interest rates in the face of stubbornly high inflation, prices are falling as traders scramble to catch up. And with that has come a grim parade of superlatives about how bad it has gotten.
On Friday, UK five-year bonds fell the most since at least 1992 after the government launched a massive tax-cut plan that can only strengthen the hand of the Bank of England.
US Treasury Bonds at two years they are in the midst of the longest losing streak since at least 1976, falling for 12 consecutive days. Around the world, Bank of America strategists said government bond markets are headed for their worst year since 1949, when Europe was rebuilding from the ruins of World War II.
The mounting losses reflect the extent to which the Federal Reserve and other central banks have moved away from pandemic monetary policies, when they kept rates close to zero to keep their economies going. The reversal has put a huge drag on everything from stock prices to oil, as investors brace for an economic slowdown.
“The bottom line is, all those years of central bank interest rate suppression, poof, gone,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “These bonds are trading like emerging market bonds, and the biggest financial bubble in the history of bubbles, that of sovereign bonds, continues to deflate.”
The latest leg down was fueled by the Fed meeting on Wednesday, when the central bank raised its policy rate range from 3% to 3.25%, its third consecutive increase of 75 basis points. Policymakers have indicated they hope to push the rate past 4.5% and keep it there, even if it takes a heavy toll on the economy.
Underscoring that point, Fed Chairman Jerome Powell said the bank “is fully committed to bringing inflation down to 2%, and we will continue to do so until the job is done.” The broad gauge of inflation the Fed targets, the personal consumption expenditures price index, is expected to show a 6% annual increase in August when it is released on September 30.
The scale of the expected interest rate hikes is likely to only deepen the Treasury market’s losses, as in previous monetary policy tightening cycles, yields have tended to peak near the Treasury’s target rate. Federal Reserve.
For now, only policy-sensitive front-end Treasuries are trading at yields above 4%, with the five-year bond briefly passing that mark on Friday. Longer-dated yields are lagging behind the rise as traders price in the risk of a recession. Still, the 10-year note hit 3.82% on Friday, a 12-year high.
“With more Fed rate hikes and quantitative tightening, as well as the possible issuance of more government debt in the future amid fewer Treasury buyers now, it all means higher rates,” said Glen Capelo, managing director at Mischler. Finance. “The 10-year yield will definitely be closer to 4%.”
In the week ahead, the market may face renewed volatility due to the release of inflation data and public speeches from Fed officials, including Vice Chairman Lael Brainard and New York Fed President John Williams. Additionally, the sale of new 2-, 5- and 7-year Treasuries will likely spur trading volatility at those benchmarks, as the market typically looks for a price concession ahead of auctions. The week will also mark the end of the month and quarter, typically a time of decreased liquidity and heightened volatility as money managers tighten holdings.
A broad Treasury index has been swamped by escalating losses and is headed for a more than 2.7% drop in September, its worst drop since April. It’s down more than 12% this year.
“Whether 4.6% is the top rate or whether they have to go beyond that depends on the trend in inflation,” said Andrzej Skiba, head of the BlueBay US fixed income team at RBC Global Asset Management, who is cautious. about being exposed to longer-term securities. Interest rate risk. “The market is totally at the mercy of the incoming inflation data, and while our view is that inflation will decline, confidence in that forecast is low.”