In turn, the yield on the benchmark 10-year Treasury this week has surged 21 basis points to over 1.72%, just a hair shy of the pandemic-high set in March. That’s already put it above the average forecast among economists and strategists surveyed by Bloomberg that it would hit 1.71% by March’s end. The consensus was for the yield to end 2022 at 2.04%.
“The speed of the move in rates has raised some eyebrows,” said Gargi Chaudhuri, head of BlackRock Inc.’s iShares investment strategy, Americas.
Fed Pivot
Those higher yields in the U.S. rippled through the world. German 10-year borrowing costs jumped to the highest since May 2019, while their Italian counterparts surged to a June 2020 high. Rate-sensitive corners of global markets have duly repriced, with the Nasdaq 100 index on track for a 3.4% loss this week.
Investors say the expectation for higher rates is justified by a tighter labor market and above-trend growth. Moreover, even after this week’s rise, 10-year yields are still nearly 0.8% below the bond market’s expected inflation rate over the next decade, a sign of still-loose monetary policy.
“This selloff is based on real yields, and that tends to get the equity market’s attention,” said Kelsey Berro, fixed-income portfolio manager at JPMorgan Asset Management. “But it’s against the backdrop of still strong growth. It’s not sinister. It’s a rationale reaction to the Fed’s pivot.”
During the last rate-hike cycle in the 2010s, the Fed waited almost two years after its first hike to begin trimming its stockpile of such assets, which caused a spike in Treasury volatility and weighed on stocks when it happened. But the Fed’s minutes showed that some policy makers favor shrinking its balance sheet soon after raising rates by not reinvesting maturity payments into new securities. That would remove another support for the market.
It’s not all bad news though. Rosanna Scarpati, a director at the brokerage Dealerweb Inc., welcomes this week’s rout since more volatility means more business. She’s fielding more calls from clients on strategies to reduce exposure to interest-rate risk.
“We all expected the rate increases coming into ‘22,” Scarpati said. “But Fed minutes really made it concrete on how much to expect this year.”
--With assistance from Libby Cherry.
This article was provided by Bloomberg News.