Treasury Yield Curve Steepens on Bet Fed Sticks to Hawkish Path – News Couple

Treasury Yield Curve Steepens on Bet Fed Sticks to Hawkish Path

(Bloomberg) — The bond market wasted little time pushing Treasury yields sharply higher in the early days of 2022, underscoring concern that higher inflation would spur tougher monetary policy from the Federal Reserve.

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The jump was driven by 10- and 30-year benchmarks, sharpening the yield curve in a sign that traders expect economic growth and high inflation will not be derailed by the record spike in the coronavirus omicron variable. Those expectations may be underlined by the release of Wednesday’s FOMC minutes from its December meeting, when it decided to move more quickly to end its bond-buying spree after the start of the pandemic.

David Kelly, chief global strategist at JPMorgan Asset Management Inc. In New York. In this scenario, the current low level of Treasury yields means that “it doesn’t take much to push them higher.”

The yield on the US 10-year bond settled at 1.65% on Wednesday, after rising to 1.68% the day before. The rally from the December 31 close of 1.51% pushed it to a 2021 high of 1.74% set in March. The 30-year bond yield rose to 2.06%, close to its October high of 2.16%.

“Even if economic growth slows due to the Omicron variable, the Fed’s inflation concerns should suffice to keep the emphasis on the right track,” Deborah Cunningham, chief investment officer for global liquidity markets at Federated Hermes, wrote in a note to clients on Tuesday. “Yield curves have already responded by regression, and we expect that to continue.”

Although the recent trend of rising long-term inflation expectations eased on Tuesday after the factory gauge for December showed a drop in the prices paid by manufacturers, the widely followed relationship between two to 10-year Treasury yields remains tight. The regression is at about 0.9 percentage points. up from its low in late December by just over 0.7 percentage points. For most of the past year, the yield curve has flattened after the 10-year yield rally peaked at the end of March, with the bond market pricing in a shallow path of price tightening.

Corporate Edition

Investor sentiment was also dampened by a rush among companies to sell new debt before yields rose further.

Prashant Nyonya, Asia Pacific interest rate strategist, said: “While the hawkish pivot of the Federal Reserve at its December meeting provides a fundamental reason for higher Treasury yields, we believe corporate oversupply and hedge against locking in interest rates amid limited liquidity. Leading that rise early in the year.” At TD Securities in Singapore.

Currently, the bond market expects the Fed to rate increases of three-quarters of a point through 2022, supporting the track forecast by policy makers last month. But the debate is over whether the first move will come in May or as soon as March.

The release of the FOMC minutes is just one sign for bond investors. It will be followed by the monthly jobs report on Friday and consumer price inflation data next week, both of which may help explain when the tightening cycle will begin.

“Labour market tightness and labor cost pressures will be a major theme in the run-up to the first Fed tightening,” said Lou Crandall, chief economist at Wrightson ICAP LLC. Unless the omicron derails the economy, Crandall thinks Fed officials may decide at their last meeting in January that “asset purchases will fall to zero after the February buying cycle,” paving the way for a first rate hike in March.

Given the Fed’s recent focus on taming inflation, the risk in the bond market is that long-term yields will push their highest levels last year until the scope of the economic recovery, inflationary pressure and the bank’s policy response is clarified.

higher rates

“You reduce inflationary pressure just by slowing aggregate demand and that requires higher rates in the long run,” JPMorgan’s Kelly said. There will be no effect on curbing inflation if long-term interest rates are not raised. The Fed is fully capable of raising long-term interest rates if it decides to reduce the size of its balance sheet along with higher rates overnight.”

For now, the Fed has set a clear path to ending its monthly bond purchases in March and then weighing things up before it starts raising rates overnight. The minutes of the December FOMC meeting will give investors an opportunity to assess how concerned the central bank is about inflation and rising hiring costs, as well as why these forces are pushing to initiate a faster pace of tapering and to update the estimated tightening path to six rate hikes. by the end of 2023.

The risk to the bond market is that the slow and steady path of the tightening that defined the last cycle may not follow this time around. Fed Chairman Jerome Powell made this point last month, when he highlighted that the economic climate is much more positive than it was just as inflation has been well above the central bank’s 2% target.

“One key point to keep in mind is that the timing between the end of tapering, the rally from the bottom line, and the start of a potentially negative balance sheet rundown should not reflect the rules of the game from the previous cycle,” analysts at Deutsche Bank say in a note to clients.

(Updates productivity levels)

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