Bloomberg News reports that the historic selloff of bonds has created chaos in the global markets throughout the year. It has given rise to a confidence crisis in almost everything ranging from the 60-40 portfolio complex to the investments related to Big Tech.
Now that the markets are heading for a probable economic slowdown, the near $24 trillion Treasury market is suddenly looking a little less scary.
The recent US consumer price data is signaling that inflation is likely cooling at long last, causing the investors to go back to the asset class that is in droves as traders pared the bets on the hawkishness of the Federal Reserve on Thursday. There is yet another cause why this avenue which was regarded as a haven at one point in time, is safer now is that the escalating interest rates have less impact on the bond portfolios compared to what they used to have in the last 24 months.
With the policy tightening campaign being aggressive of the Fed in the present year, which has been pushing the Treasury yields to highs in decades, the so-called margin of safety for individuals buying US debt at present was found to be improving remarkably in contrast to lower rate period, much before the collapse of the bull market during the period after the pandemic.
Bloomberg News reports that the amount an investor is entitled to compensation for every unit of duration risk has surged with higher yields, and this has enhanced the bar before a further surge in yields might lead to capital loss. Two factors responsible for reducing interest rate risk include shorter maturities and higher coupon payments.
After all, the cooling consumer prices in October extend some hope that the biggest inflation shock in almost four decades is gradually easing, which could also be a welcome development for the US central bank. The US central bank is scheduled to meet next month to deliver at least a 50 basis point increase as far as the benchmark rates are concerned.
The figure to which the two-year Treasury yields escalated in the current month is as high as 4.8%, the highest since 2007. However, despite the same, it plummeted 25 basis points on Thursday in the CPI report. The 10-year yield in a note hovering around 3.8%, up from 1.51% during the end of 2021, was found to slide by 35 basis points ts over the last week. The same was shortened because of the Veteran’s Day holiday on Friday.
The Sherman ratio, which was named after Jeffrey Sherman, the Deputy Chief Investment Officer of DoubleLine Capital, on the Bloomberg USAgg Index, was found to be increasing from 0.25, which was the figure a year ago, to 0.76 currently. This only means that it would require 76 basis points in the interest rates over one year to offset the bond yields.
Compared to this scenario, if it had been just a year ago, it would have taken only 25 basis points, equivalent to Fed’s single regular-sized hike.
