Bond slides deep, there’s no end in sight

Moving to Friday, there was widespread hope on Wall Street that bond yields had finally arrived. reached the peak of this year’s climb, after substantial efforts were made to tighten financial conditions so that consumer demand and inflation could gradually return to more stable levels. Now, many say they have no idea how high short-term interest rates will need to be for the Federal Reserve to gain control over prices, which are currently several times higher than the central bank’s annual target of 2%. are increasing.

“There’s definitely an element of dedication,” said Thomas Simons, senior vice president and money-market economist in the fixed income group at Jefferies LLC, in the bond market’s move. “There is a general acceptance that Friday’s data had a deeper message.”

The yield on the Treasury largely reflects investors’ expectations for short-term rates over the life of a bond, and they in turn set a floor on borrowing costs in the economy. On Monday, the yield on the benchmark 10-year US Treasury note closed at 3.371%, the highest close since April 2011 and up from 3.041% on Thursday.

According to the report of The Wall Street Journal, the yield in after-hours trading rose further to 3.437%.That Fed Could Surprise Markets by raising short-term rates by 0.75 per cent at its policy meeting ending Wednesday – an aggressive move it has not taken since 1994 and a hike half a percentage point increase delivered it In the meeting of 3-4 May.

The two-year yield, more sensitive to the near-term outlook for monetary policy, rose to 3.279% from 2.815% on Thursday, and rose to 3.413% in late trade following the Journal report. It has risen 0.641 percentage points in the last seven trading sessions, its biggest seven-day return since 2001.

According to investors and analysts, Friday’s consumer-price-index data could hardly be more disappointing. Not only did headline inflation hit a four-decade high when many investors had expected it to fall below it, but there was a substantial price increase across the board in everything from housing costs to children’s shoes.

So, investors can’t blame the report on any one category, as some did last month when rising airline costs played a big part in it. Advancing the closely watched measure of inflation This does not include volatile food and energy costs.

In another blow to the Treasury, data released just an hour and a half after the CPI report showed consumers’ long-term inflation expectations rising to its highest level since 2008, This has hurt the argument that stable inflation expectations would help in containing real inflation.

“The reality is we are not seeing enough signs that things are slowing down,” said Daniela Mardarovici, co-head of multisector fixed income at Macquarie Asset Management, referring to the level of economic activity and inflation.

The result, he said, is that investors have had to raise their expectations for so-called neutral levels of interest rates that neither stimulate nor slow economic growth. In turn, this has raised the short- and long-term US Treasury yields. The two-year yield surpassed the 10-year yield in post-trade trading Monday, often considered a warning sign about the economic outlook.

Treasury yields play an important role in both the economy and financial markets. Their growth this year has helped push the average 30 year fixed mortgage rates above 5% For the first time in over a decade. They have also dragged down stock prices, increased the opportunity cost in foregoing bonds to equities and dealt a particularly heavy blow to relatively unprofitable companies for their long-term earnings potential.

the bonds themselves Huge loss this year As a result of plunging prices, major bond indexes are already on pace for their worst year on record ahead of Monday’s sell-off.

As of Friday, the Bloomberg US Aggregate Bond Index – largely US Treasuries, highly rated corporate bonds and mortgage-backed securities – had given a minus 11% return this year. Its second worst performance in the same period was 1984 at minus 2.9%, a record going back to 1976.

Many investors and analysts still believe the worst is over for bonds, which indicates slow housing demand And declining consumer confidence is a sign that higher interest rates are already taking their intended effect of cooling the economy.

Still, others have cautioned that the bond’s poor performance could create its own downside.

“Perhaps the biggest risk to higher rates is that investors decide to just sell the bond,” said Donald Ellenberger, a senior fixed-income portfolio manager.

federated hermes,

“If investors decide that bond hedging stocks aren’t doing very well and still not providing much income, we could see rates rise as Wall Street dealers lack balance sheet capacity or desire to warehouse bonds.” No. I don’t want to.”

write to sam goldfarb sam.goldfarb@wsj.com