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Yields on the U.S. benchmark 10-year Treasury, which move
inversely to bond price, reached a high of 2.417% earlier this
week as investors factored in a more aggressive Fed, a 90 basis
point gain since the beginning of the year and its highest level
since May 2019.
Many investors expect more turmoil in bonds, as soaring consumer
prices push the Fed into full inflation-fighting mode. Goldman
Sachs on Thursday raised its year-end forecast for the 10-year
yield to 2.7% from an earlier projection of 2.25% and predicted
a “modest” inversion of the Treasury yield curve, though the
bank’s analyst said the phenomenon would not necessarily be
indicative of an oncoming recession, as it has in the past.
Here is a quick look at the state of the Treasury market nearly
three months into 2022.
The ICE BofA Treasury Index is down 5.6% this year, its worst
start in history, as investors reprice a Fed that is now
expected to tighten monetary policy by a further 190 basis
points this year and has said could raise rates by 50 basis
points at one of its upcoming meetings if warranted.
Investors worried that hawkish monetary policy could dent growth
have been eyeing the shape of the Treasury yield curve, which
has increasingly shown yields on some shorter-dated debt rising
above yields on longer-dated debt.
An inverted yield curve is typically a sign that investors are
worried about the economy and recessions have followed when
yields on 2-year Treasuries have risen above those on 10-years.
That part of the yield curve has so far not inverted, although
the gap between yields has narrowed dramatically in recent
weeks.
Analysts at Goldman Sachs said they expected that part of the
yield curve to invert this year, though such a move would not
necessarily signify a recession due to the current "high
inflation" environment.
"In such an environment, a deeper nominal curve inversion may be
needed to produce the same recession odds in models as seen in
more recent business cycles," Goldman’s analysts wrote in a
recent report.
Investors also have been watching so-called real yields, or the
nominal yield of a bond minus the rate of inflation.
Negative real yields on Treasuries have burnished the
attractiveness of stocks and other comparatively risky assets
for more than two years, helping to underpin the S&P 500’s
doubling from its March 2020 lows. Yet they have started to move
higher in recent weeks, reflecting the Fed's increasingly
hawkish stance. That may signal further trouble ahead for the
S&P 500, which is down 5.2% this year.
The selloff in bonds likely bruised investors who had recently
piled into Treasuries, a popular safe haven, as geopolitical
uncertainty soared after Russia invaded Ukraine last month. The
TLT iShares 20+ year Treasury bond ETF – often used by investors
to express views on the government bond market – saw net inflows
for the last six weeks, the longest streak in three years.
Other segments of the market appear to have been positioned for
higher yields, however. CFTC data on Treasury futures, which
captures positioning by hedge funds and other shorter-term
market participants, shows investors have a net short position
on 10-year Treasury futures since mid-October.
(Reporting by Saqib Iqbal Ahmed and Davide Barbuscia: Writing
and additional reporting by Ira Iosebashvili; editing by Diane
Craft)
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