According to Bloomberg News, a consensus is seen developing in the world’s largest bond market as the Federal Reserve puts in the effort to pull back the pandemic stimulus. The road ahead is rough.
Jerome Powell, the Fed Chair, stated Wednesday that a humble and agile approach would be taken by policymakers when it comes to raising interest rates. The steps are being taken so that inflation that has been at an all-time high in the last four decades can be tamed, thereby splitting and ripping apart the policy playbook that several traders anticipate.
This has left the Treasury bond traders embracing a period characterized by volatile price swings, with the analysts believed to go through every detail of Fed data amidst the prevailing economic uncertainty.
Powell created a rattle in the markets on Wednesday when he made a statement that the bank will start raising rates in March and that it is also looking forward to stronger rate hikes compared to what has been expected. Following his statement, it was seen that there was a surge in yields from Treasury, forcing the ones on a 2-year note up by as much as 1.2%, which was earlier at 0.7% at the beginning of the year.
Few hedge fund traders betting on the changes in the yield curve were taken by surprise and were forced to suffer huge losses and exited in the past week.
Bloomberg News also reports that it is also being anticipated that there might be a little certainty at least till mid-March since no new central bank meetings are supposed to take place until then. The employment report of January is also being closely monitored to find out if wage pressures are growing as employers strive hard to recruit new employees. There is a strong forecast that the hourly earnings on average have escalated by 5.2% compared to last year, which is well above 3.5% that existed in 2019.
Bloomberg News reports another upcoming event related to the bond market in the next week, and that is the announcement of Treasury debt funding on Wednesday. This is when it can be found out about the bond offerings. It is being expected mainly that Treasury will slash sales of longer-term nominal debt.
Another area of uncertainty is the plan that Fed is trying to shrink the approximately $9 trillion assets stockpile, and this it is going to achieve by not buying back the mortgage bonds that are new and when the old ones mature, which is a shift once it starts to raise the rates. The difference in yield between 5-year and 30-year has narrowed down to lower than half a percentage point. This, aside from extreme volatility in March, is also the flattest since the beginning of 2019.
