Government bond yields are rising rapidly. Johannes Eisel/AFP via Getty Images
There’s good reason why investors are surprised that something hasn’t happened to the economy yet. The last time U.S. Treasury yields rose this quickly, the country crashed. continue recession.
The 10-year Treasury yield, a key measure of the cost of funds across the financial system, has risen more than 4 percentage points over the past three years and briefly exceeded 5 percent this week for the first time since 2007. This was the biggest rise since the early 1980s, when Paul Volcker’s efforts to curb inflation pushed 10-year Treasury yields to nearly 16%.
In some ways, the similarities are not surprising, since Fed Chairman Jerome Powell’s rate hikes were the most aggressive since then. Another example highlights how times have changed.
In the 1980s, an onslaught of monetary policy triggered two recessions.Now, the economy continues to defy pessimistic forecasts, with the Atlanta Fed’s estimate This suggests further momentum is likely to occur in the third quarter.
Of course, policies during the Volcker administration were more restrictive. The “real” 10-year Treasury yield, adjusted for consumer price increases, or after inflation, was about 4% at the start of the second recession in mid-1981, according to data compiled by Bloomberg. Ta. Now it’s about 1%.
But still, the incredible economic strength has created a great deal of uncertainty in the market, and bond yields have soared over the past few months amid growing confidence that the Fed will keep interest rates high.
It remains to be seen whether this resilience can be sustained. Billionaire investor Bill Ackman ended his bearish bet on long-term bonds on Monday. saying The economy is slowing down rapidly.
But the year started with similar voices, along with hopes that bond markets would rise as the Fed changed policy.
Instead, bond prices continue to fall. The Bloomberg U.S. Treasury Total Index has fallen about 2.6% since the beginning of the year, increasing the decline to 18% from its peak in August 2020. By comparison, the worst previous peak-to-trough drawdown was a decline of about 7% in 1980, when the Fed’s main index hit 20%. The decline was made more painful because interest rates were low, pushing down income payments that could help offset the hit.
Another factor is that the federal deficit is flooding the market with new bonds as traditional big buyers, including the Fed and other major central banks, pull back on bond purchases. This is believed to be one reason why yields have been rising in recent weeks, even though futures markets indicate that traders believe the Fed’s rate hike is likely to be completed. There is.
“A hard landing is kind of our base case, but you can’t point to any data and say, ‘Look here, this is a clear leading indicator of a recession,'” said Priya Misra, a portfolio manager at JPMorgan. I can’t say that.”asset management
“The level of conviction is low,” she said. Investors who were buying bonds “have all been hit,” he said.
