Treasurys sold off across the board Tuesday, extending moves from the previous day and sending short-dated debt hurtling toward its worst quarterly performance in almost four decades after Federal Reserve Chair Jerome Powell’s aggressive monetary policy comments revived the prospect of a bumper half-point rate hike.
Ten-year yields led Tuesday’s advance, at one pointing climbing close to 10 basis points on the day. Two-year yields, which are among those more closely linked to policy expectations, were up around seven points to 2.18% as of 10:18 a.m. in New York. That extended their increase since 2021 to 145 basis points, putting them on course for the biggest quarterly leap since 1984, when the U.S. central bank was tightening policy in increments of 50 basis points or more.
Meanwhile, money markets were pricing in the prospect that officials might do the equivalent of eight more standard quarter-point hikes by the end of 2022 and a more than three-in-four chance of a 50-basis-point increase when the Fed next meets in May. The moves come after Powell struck a hawkish tone on Monday, prompting traders to rapidly ratchet up estimates for how aggressively the Fed will tighten monetary policy this year.
The impact rippled across to the gap between 5- and 30-year yields, which narrowed further to the smallest since 2007, a sign to some that tighter policy will slow the economy or even cause a recession. That’s prompting investors to question the ability of bonds to offer protection in such a scenario.
“I’m not saying that bonds cannot buffer if we’re facing recession risks,” Christian Mueller-Glissmann, managing director of portfolio strategy and asset allocation at Goldman Sachs International, said in a Bloomberg Television interview. “But you have to also be careful about how much an asset -- like a safe asset -- buffers you in risk off relative to how much it costs you in risk on,” Mueller-Glissmann said, adding that his firm is avoiding credit and sovereign bonds.
Broad Losses
Treasurys more broadly are on course for the worst quarterly losses the market has seen since at least 1973. The Bloomberg U.S. Treasury Index had lost 5.55% since Dec. 31 as of Monday’s close, surpassing the 5.45% slump at the start of 1980 that stands as the biggest quarterly decline since the gauge’s inception.
The tone of Powell’s remarks reinforced the view that the main monetary-policy concern from the war in Ukraine is that it will worsen inflation and leave it more entrenched in the U.S. economy. That such a risk appears more prominent than a slowdown in growth opens the door to tightening policy at a much faster pace toward the bank’s late-2023 target of 2.8% for overnight rates.
While the price moves were strongest in the shorter-dated parts of the Treasury market that is typically hit hardest by monetary-policy tightening, yields also jumped on the longer end, including on the 10-year benchmark that serves as a touchstone for global markets and underpins the cost of borrowing for households and companies.
--With assistance from Anna Edwards, Matthew Miller, Kailey Leinz and Benjamin Purvis.
This article was provided by Bloomberg News.