Like many on Wall Street, Priya Misra was hoping for a quiet start to the year.
Instead, the interest-rate chief at TD Securities was left reeling as a major Treasury selloff rocked global markets, thanks to hawkish signals from the Federal Reserve.
Five-year yields jumped 21 basis points in four days for the steepest new-year increase in almost two decades -- spurring a disruptive rout across assets of all stripes, from high-flying tech stocks to cryptocurrencies.
A broad measure of Treasurys lost some 1.4% this week, extending the annus horribilis for investors in the world’s biggest bond market.
“I’m already a bit sleep deprived -- which I didn’t expect this early in the year,” said Misra, who has to juggle between work and a family life that now includes getting her kids tested for Covid before going to school. “So pandemic concerns are still there. But instead of lower rates and Fed easing, we are grappling with how fast the Fed exits and how high rates can go higher. That can make anyone’s head spin.”
Bearish sentiment gathered force Wednesday when the Fed’s December meeting minutes indicated the central bank is poised to take a more aggressive approach in the face of the steepest inflation since the early 1980s. On Friday, the Labor Department is expected to report an increase in job growth, which would further underscore the case for higher rates.
“It’s been a bit of wicked market action the last couple of days,” said Salman Baig, an investment manager at Unigestion SA. “If there are low unemployment numbers, that would bolster their case and potentially feed into this.”
Traders have been bracing for the Fed to start pulling back the tide of cash it has pumped into markets since the onset of the pandemic, elevating the price of everything from real estate and meme stocks to speculative tech-company shares. But even so, the swift repricing this week caught some by surprise.
Just ask Misra, who heads up TD’s interest-rate strategy. Before the release of the Fed minutes Wednesday afternoon, she and her colleagues recommended that clients buy two-year Treasuries. They expected the surge of the omicron variant to dampen the odds of a rate hike as soon as March. Instead, the securities slipped when the minutes suggested the bank may raise rates earlier and faster than previously expected.
The Fed also signaled it may start paring its stockpile of bond holdings faster than it did during last decade’s tightening cycle.