Source: Wall Street News
After Powell bluntly stated that after the next meeting to discuss raising interest rates by 50 basis points, the president of the San Francisco Fed, who was originally dovish, also emphasized that he would raise interest rates by 50 basis points in the next two meetings. What the market then saw was another epic sell-off in U.S. Treasuries.
But some people feel that they will have to wait, until U.S. inflation soars again, and until the Fed speaks out and lets U.S. bond yields “fly for a while.”
After the head of the Fed, Powell, bluntly stated that he would discuss raising interest rates by 50 basis points at the next meeting, San Francisco Fed President Daly, who was originally a dovish stance, “reversely operated” and emphasized that he would raise interest rates by 50 in the next two meetings. After the basis point, what the market saw was another epic sell-off in Treasuries.
The yield on the 10-year U.S. Treasury bond rose during the session on Thursday, and the intraday increase once expanded to more than 10 basis points, nearly wiping out the “dive” on Wednesday. By the close of U.S. stocks, it was about 2.90%, up about 7 basis points during the day; and the yield on the 2-year U.S. Treasury bond, which is more sensitive to interest rates, approached 2.73% at one point after Powell’s speech, hitting a new intraday high since December 2018.
However, in the face of the slump in U.S. debt, some investors and analysts believe that the “inflation frenzy” that has plagued the bond market this year has gone too far, and they believe that it is a good time to buy cheap bonds.
A Bloomberg index of long-term U.S. Treasuries has fallen more than 18 percent this year, on track for its biggest drop since 1973.
Combined with water-cutting measures from the Federal Reserve and major central banks around the world, a pullback in the price of 10-year U.S. Treasuries has pushed their yields, the benchmark for global bond markets, to nearly 3%, a rare high that is starting to sway funds. Managers and investment banks wonder, is there room for yields to rise?
Buy now!
According to the Financial Times, Bank of America rates strategists said on Wednesday:
We think the current level of 10-year (U.S. yields) is attractive for investors to (buy bonds)…Inflation concerns have reached a feverish or even panic level…Our forecast suggests that inflation will peak this quarter , and decline steadily through 2023.
Bank of America also added:
We believe this (bond purchases) will reduce inflation fears and interest rates will likely fall.
The Financial Times also pointed out that the higher returns that can be achieved by holding bonds are already attractive to fund managers.
Edward Al-Hussainy, senior rates strategist at investment group Columbia Threadneedle, said:
They (U.S. Treasury yields) are now high enough to buy…that’s what we’re doing.
However, Al-Hussainy also warned that U.S. bond rates could go higher:
I don’t think you can be sure that this is the top until you get a signal from the Fed that they are overdone or risk assets correct.
In addition, even some stubborn bond bears are now wondering whether the sell-off was overdone.
Dickie Hodges, a bond fund manager at Nomura Asset Management, said he has been “adding a little bit of exposure” to long-term bonds as yields have risen, noting:
I think it’s too early to say that yields have peaked…but central bankers know that a substantial increase in interest rates on top of that will tip the economy into recession. And I believe that inflation will moderate later this year, so long-term yields will look attractive.
or wait…
However, there are still investors who believe that it is not time to announce the bottom-hunting time, and remain cautious.
Barclays this week dropped its recommendation to buy the 10-year Treasury note issued earlier this month after U.S. yields continued to rise. The bank said the possibility of the Federal Reserve’s “excessive tightening” and a “hard landing” for the U.S. economy has faded, and the central bank may instead allow higher inflation expectations to become entrenched.
And, Fed board member Lael Brainard said earlier this month that the central bank would begin “rapidly” shrinking its balance sheet, possibly as early as its May meeting. This move also makes fund managers reluctant to buy U.S. bonds at the moment, considering that this will further suppress long-term government bonds.
James Athey, bond fund manager at asset manager Abrdn, said:
If I could close my eyes and open them in 6 months, I think I’d be comfortable buying in here…but the uncertainty about getting there makes it hard to get the timing right…so What is needed (timing) is an upside surprise in inflation or some unabashed rhetoric from the Fed to send yields soaring again.
edit/roy
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