Some investors believe Treasury yields are on the verge of a peak, even as markets continue to price in more hawkishness from a Federal Reserve determined to rein in the worst inflation in decades.
It’s a refrain that’s been heard more than once in 2022, as a strong sell-off in Treasuries sends investors betting that markets will soon reverse, while hitting stocks and fueling the dollar rise.
The fall in bonds has intensified in recent days as US Treasury yields – which move inversely to prices – hit their highest levels since the 2008 global financial crisis on fears the Fed may have to raise its bonds. rates more aggressively to bring down consumer prices.
Meanwhile, federal funds futures on Thursday night pegged peak U.S. interest rates of 5% in May next year, up from bets this month that saw the rate at 4 .4% at that time.
Still, some investors see the Treasury sell-off coming to an end, believing the Fed will slow the pace of its increases next year as inflation ebbs or the economy falls into recession.
John Vail, chief global strategist at Nikko Asset Management, expects the Fed to raise rates by a total of 150 basis points over the next two months, then start cutting rates in the first half of the year. next.
“This forecast is accommodative after January, which should provide major relief to equity and bond markets,” he said.
Others believe that higher yields will soon begin to attract investors to Treasuries. Joachim Fels, managing director and global economic adviser at US fixed income giant PIMCO, recently wrote that markets have already priced in future rate hikes and that “absolute yield levels look much more attractive than they have since long time”.
Benchmark 10-year yields were at 4.23% on Thursday evening while two-year yields were at 4.61%, presenting a more alluring picture for investors looking for income compared to the start of the year. , when these yields amounted to 1.5% and 0.7% , respectively.
Among those embracing the idea of a coming peak in yields is DoubleLine Capital Managing Director Jeffrey Gundlach, who tweeted on Thursday that there were “signs of exhaustion in the yield boost. Treasury yields could well peak by the end of the year.
Meanwhile, fund managers in a recent BofA Global Research survey are the most bullish on long-term bond yields since November 2008, with 38% expecting long-term rates to fall over the past 12 coming months.
Vanguard, the world’s second-largest asset manager, told Reuters last month that US Treasuries were near the end of a painful decline.
Nasty Treasury bulls also point out that many yields are very close to where the Fed said it thinks interest rates will end next year.
Some investors were more reluctant to call a spike, citing the Fed’s strong push to lower consumer prices, which have proven far more bullish than many had expected this year.
“With inflation so high and still rising, it would be a mistake to assume that central banks will turn to easing if something does indeed break,” the BoFA strategists wrote. “Depending on where they are in their crunch cycle, they may not even stop.”
The Fed has raised rates by 300 basis points since the start of the year. Fed funds futures traders are pricing in a 95% chance of a 75 basis point hike at the Nov. 2 central bank meeting, Fed Chairman Jerome Powell’s views on with inflation and the economy seen as the next potential catalyst for yield moves.
Futures contracts show traders pricing in a 75% chance of another 75 basis point rise in December, according to data from CME Group.
Zhiwei Ren, managing director and portfolio manager at Penn Mutual Asset Management, believes yields could fall if the economy slips into a recession. But he said persistent labor shortages, broken supply chains and other long-term changes in the global economy are likely to keep inflation high.
“Just three months ago I thought 3.5% was a great level for 10-year-olds,” he said. “Now I think the 10-year could go up to 5% or even more over the next few years.”
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