Treasury traders defy counterparts in stock markets and are not buying into Jeremy Powel’s announcement, which is upbeat on growth. After Wednesday’s policy decision announcement, one indicator in the bond market is flashing red for the first time since the pandemic.
The concern regarding rising interest rates
As per Bloomberg News, Federal Reserve raised the interest rate on Wednesday and predicted that the remaining six meetings in 2022 will also see hikes. This led to the gap between five- and ten-year yields in a section of the treasury curve becoming inverted for the first time after March 2020. The two- and ten-year yield trend remains flattened.
The time-tested indicators show the pains of future growth resulting from inflation fueled by the Russian invasion of Ukraine persists. Official predict interest rate hike of up to 2.8 % by 2023 end, and the bond traders are concerned increasingly about the economy which could buckle under the monetary policy normalization weight.
According to RBC Global Asset Management, Fixed income head, Andrzej Skiba, the market is pricing the recession risk on the higher side, leading to inverted five-to-ten-year yields. He said the Federal Reserve sends out a strong commitment to fight inflation.
Federal chair Powell said in the meeting, seen as hawkish by many, that the central bank is keeping all the options open to fight the highest inflation in decades. The trader, in turn, pushed the two-year yield to a new high and just short of 2 %. It is clear now that the trade swings, which were so volatile in the fixed income trading, will continue for some time now.
The stock trader comforted Federal Reserve’s firm resolve to restore price stability. The bond investors, which were already struggling with the worst performance in decades as per the Bloomberg Treasury index, are bracing for more losses.
Some saw the Federal Reserve forecast for an aggressive hike in rates as an acceptance of the policy behind the curve given the elevated inflation. The press conference has signaled a hawkish approach of Powell that challenged the bond market, which was expecting a measured pace of tightening policy given the backdrop of an uncertain global economy.
Powell downplayed the risk of recession in the U.S. next year and stated that tightening monetary policy can be achieved without affecting economic growth.
Following a sharp selloff on Wednesday, treasuries rebounded in Asia, Trading across the curve. Yields for five-year tenure fell by five basis points to 2.14%.
The Asian equity benchmark rebounded by more than 3 % after the U.S. stock rally -bucking bond market concerns. Wall Street strategists are treading carefully despite the economic data showing a strong investment and consumption pattern and a healthy labor market.
Diana Swonk, the chief economist with Grant Thorton, said that the Fed is chasing inflation and going all out to bring inflation down.
