(Bloomberg Opinion) — It’s too soon to abandon hopes of a strong bond market rally in 2023, which seemed a sure thing just a month ago.
Bloomberg’s Most Read
But even if reinvesting in Treasuries proves to be a winning trade, sticking with it won’t be for the faint of heart.
A surge in job growth, rising consumer spending and faster-than-expected inflation have sent bond prices falling again by convincing traders the Federal Reserve will keep raising interest rates and will keep them there for longer than intended. The slide wiped out strong gains from January, when markets were still betting the central bank was almost done tightening and would be cutting rates by the end of the year.
“This has been a difficult month for the bond market,” George Goncalves, head of US macro strategy at MUFG Securities Americas Inc., said on Bloomberg Television on Friday. “A lot is priced in right now, but at the same time, if we don’t see a move lower in the inflation readings for March, April and May, then we have a bigger problem on our hands for the market.”
On Friday, the bond market was hit by fresh selling momentum after the Fed’s favorite inflation gauge, the Personal Consumption Expenditures Index, unexpectedly accelerated in January, rising 5.4% from the previous year. last year. That boosted yields across the board, driving two-year Treasuries as high as 4.84%, the highest level since 2007. A broad market gauge of Treasuries has lost about 2.6%. in February, leaving values slightly lower in 2023 after the first consecutive annual losses since at least the early 1970s.
The inflation reading followed a steady drumbeat of strong economic data that has fueled speculation that the Fed still has a ways to go before winning its fight against inflation. Swap traders are now pricing in quarter-point rate hikes at the March, May and June meetings, which would push the target range for their key benchmark to 5.25%-5.5%.
However, even on the more aggressive path, investors still see reason for some optimism. Most of the losses from central bank tightening are still likely in the past, as it has already pushed its rate from near zero last March to 4.5-4.75% today. Higher interest payments on Treasuries are also softening the blow.
“It looks like the pendulum has swung the other way in the bond market – we’re starting to trade on a very aggressive path of rate hikes,” said Subadra Rajappa, head of US rate strategy at Societe Generale SA, who sees the nearly 4% yield on the 10-year Treasury as a buying opportunity. “It is very complicated now. It is still too difficult with the data we have to be clear on the Fed’s path going forward.”
The market may get a temporary reprieve from the selloff in the next week because there are no major data releases. The Treasury Department also wrapped up its note auctions through March 7, while portfolio rebalancing at the end of the month may spur buying by fund managers.
RJ Gallo, a senior portfolio manager at Federated Hermes, said the likelihood of a more hawkish tactic from the Fed has raised the odds of a US recession, which would send bond prices soaring in the next years. Also, current yields are attractive, he said in a Bloomberg television interview, adding that the company is overweight Treasuries in its total return bond fund.
“In January there was too much enthusiasm in the bond market,” Gallo said. But, with the returns as high as they are, “you now have income to support the total return.”
what to see
-
economic calendar
-
February 27: durable goods orders; pending home sales; Dallas Fed Manufacturing Activity
-
February 28: Progress in good trade balance; wholesale/retail inventories; FHFA Home Price Index; S&P CoreLogic CS Home Price Indices; NMI Chicago PMI; Richmond Fed Manufacturing Index; Conference Board Consumer Confidence; Richmond Fed Trading Conditions; Dallas Fed Services Activity
-
March 1: MBA Mortgage Applications; S&P Global US Manufacturing; construction expenses; ISM manufacturing; Neighborhood vehicle sales
-
March 2: Non-agricultural productivity; unit labor costs; unemployment claims
-
March 3: S&P Global US Services PMI; ISM services
-
-
federal calendar
-
February 27 – Fed Governor Philip Jefferson
-
February 28 – Chicago Fed President Austan Goolsbee
-
March 2: Fed Governor Chris Waller
-
March 3: Dallas Fed President Lorie Logan; the president of the Federal Reserve of Atlanta, Raphael Bostic; Federal Reserve Governor Michelle Bowman
-
-
Auction Schedule:
-
February 27: 13 and 26 week bills
-
March 1: 17-week bills
-
March 2: 4 and 8 week bills
-
–With the help of Elizabeth Stanton.
Bloomberg Businessweek Most Read
©2023 Bloomberg L.P.