Bonds slid globally as the prospect of stimulus in China bolstered risk appetite and refocused investor attention on the inflation trend that has the Federal Reserve on course to raise rates for the first time in years Wednesday.
The U.S. 30-year yield reached 2.53%, the highest level since mid-2019, and some Wall Street strategists predict the 10-year rate by year-end will be around 3% -- a level that’s proved troublesome for risk assets in the past. European sovereign debt was also under pressure, with German 10-year yields rising to the highest since 2018.
A quarter-point rate increase by the Fed Wednesday is fully priced into money-market derivatives, which also partially price in a half-point increase by the central bank at a subsequent meeting later this year. With inflation running at the highest level in more than forty years, Fed officials’ revised projections for the policy rate in future years to be released after their meeting are widely expected to be higher.
Stephen Stanley, chief economist at Amherst Pierpont Securities LLC, forecasts the 10-year Treasury yield, recently around 2.18%, will end this year at 3.1%. He foresees the Fed lifting its policy rate from its near zero level to a peak of between 3% and 4%.
“Inflation has to be job one at this point” for the Fed, Stanley said in an interview Tuesday on Bloomberg Television’s “Balance of Power With David Westin.” Russia’s invasion of Ukraine last month “introduces more uncertainties on both sides of the equation for them because it could be a drag on the economy but it could also further exacerbate inflation pressures -- and it could make inflation expectations rise, which is something they are very fearful of.”
Ten-year Treasury yields rose as much as six basis points to 2.20% Wednesday. The German 10-year yield increased as much as seven basis points to 0.40%.
China issued statements in support of policies to boost financial markets and stimulate economic growth. Optimism about an abatement of the war in Ukraine was bolstered after the Kremlin said a Ukrainian proposal to become a neutral country “could be viewed as a certain kind of compromise.”
Russia’s invasion has sent commodity prices flying, adding to inflation expectations after the U.S. posted the highest consumer-price gains in 40 years last month. That’s whiplashed bond markets, with traders caught between a bid for havens and a selloff in the face of soaring consumer-price growth.
Jonathan Cohn, head of rates trading strategy at Credit Suisse Group AG, said in a note that his team has “re-engaged” their prediction before the Feb. 24 invasion of Ukraine for the 10-year yield to reach 2.7% by year’s end.
“The increasingly prevalent belief, at least seen in the market, is that yields will need to go higher, either to reflect the need for tighter financial conditions to curb inflation or to reflect the higher inflation expectations from growth/risk-asset motivated policy restraint,” Cohn said. Thus, “yields continue to find support in both risk-on and risk-off trading.”