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What does the chart show?
The first quarter of 2022 saw the worst quarterly performance of US Treasuries (government bonds) on record as the Fed moved to tackle soaring consumer prices by withdrawing stimulus and hiking interest rates. Markets now see a strong possibility that the Fed will increase rates by 50bps at its May meeting. The expectations for a more hawkish Fed led to a sell-off in Treasuries across all maturities. Given the inverse relationship between bond prices and yields, the first three months of 2022 has seen yields rise sharply with shorter-dated debt bearing the brunt of the Fed’s more hawkish stance.
Why is this important?
Driven by fears that central banks will have to be more aggressive in suppressing multi-decade high inflation, global bond markets have experienced heightened volatility so far this year. Fed Chair Powell recently signalled his willingness to support a 50bps hike at May’s Federal Open Market Committee (FOMC), with other Fed officials also echoing his stance. Fed policymakers have expressed that combatting rising inflation is their top priority and they may be willing to risk slower growth in order to reach the Fed’s 2% target. Shorter-dated debt has especially suffered with 2-year Treasury yields rising the most in one quarter since 1984 and last week, the 2-year yield exceeded the 10-year yield for the first time since 2019 (a yield curve inversion is seen by many as an indicator of a recession), reinforcing the view that these steeper rate hikes by the Fed may cause a recession due to demand destruction. Investors have become accustomed to Treasuries playing a reliably defensive role in portfolios in recent decades, and whilst they might continue to do so at times, particularly at points of market crisis, high inflation and low bond yields pose a key risk and we anticipate more volatile periods ahead for the world’s favoured safe-haven asset class.
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By Mondial DubaiWhat does the chart show?
The first quarter of 2022 saw the worst quarterly performance of US Treasuries (government bonds) on record as the Fed moved to tackle soaring consumer prices by withdrawing stimulus and hiking interest rates. Markets now see a strong possibility that the Fed will increase rates by 50bps at its May meeting. The expectations for a more hawkish Fed led to a sell-off in Treasuries across all maturities. Given the inverse relationship between bond prices and yields, the first three months of 2022 has seen yields rise sharply with shorter-dated debt bearing the brunt of the Fed’s more hawkish stance.
Why is this important?
Driven by fears that central banks will have to be more aggressive in suppressing multi-decade high inflation, global bond markets have experienced heightened volatility so far this year. Fed Chair Powell recently signalled his willingness to support a 50bps hike at May’s Federal Open Market Committee (FOMC), with other Fed officials also echoing his stance. Fed policymakers have expressed that combatting rising inflation is their top priority and they may be willing to risk slower growth in order to reach the Fed’s 2% target. Shorter-dated debt has especially suffered with 2-year Treasury yields rising the most in one quarter since 1984 and last week, the 2-year yield exceeded the 10-year yield for the first time since 2019 (a yield curve inversion is seen by many as an indicator of a recession), reinforcing the view that these steeper rate hikes by the Fed may cause a recession due to demand destruction. Investors have become accustomed to Treasuries playing a reliably defensive role in portfolios in recent decades, and whilst they might continue to do so at times, particularly at points of market crisis, high inflation and low bond yields pose a key risk and we anticipate more volatile periods ahead for the world’s favoured safe-haven asset class.