A wild year on Wall Street has traders fretting one of two extreme scenarios will engulf the $23 trillion Treasury market ahead: Either a fresh bond selloff thanks to red-hot inflation -- or a sustained rally on mounting recession risk that sends yields back toward historic lows.
Market participants are butting heads over what big move will come next.
The Federal Reserve is embarking on a high-wire mission to ramp up interest rates at the fastest pace in decades without crashing the real economy, endangering investing styles of all stripes.
In a bearish scenario, managers like Bridgewater Associates reckon the 10-year yield could jump to 4% as inflation proves relentless -- a prospect that risks more damage for just about everything from tech stocks to emerging markets.
On the bullish flip side, an economic “hurricane” talked up by JPMorgan Chase & Co. Chief Executive Jamie Dimon could see yields falling back around 2.25%, according to a less-popular but no less-volatile scenario advanced by the likes of Standard Chartered Plc.
It all threatens to add a fresh twist for Treasury investors, who are already grappling with haywire moves and near double-digit losses with few precedents in the modern trading era.
Corporate America and its investors are mired in economic uncertainty as inflation stays near four-decade highs while signs emerge of consumer weakness and lockdowns in China add to risk of global stagflation. JPMorgan’s Dimon told clients last week to prep for tougher economic times -- a warning echoed by Goldman Sachs Group Inc.’s John Waldron but downplayed by many including Bank of America Corp.’s Brian Moynihan.
“It’s a very bimodal world now,” says Vineer Bhansali, the founder of LongTail Alpha LLC. “It’s either an inflationary outcome where yields keep going up, or a deflationary outcome where yields go down.”
In statistical parlance, the tails are getting fatter, meaning the probability of extreme events in either direction is at the risk of rising. While asset managers have built up net longs in 10-year futures to the highest in about two years, leveraged funds are short, according to Commodity Futures Trading Commission data.
Bhansali for one, reckons behind-the-curve monetary officials will overshoot with interest-rate hikes -- spurring short-dated yields higher initially and ultimately killing off the economic expansion eventually.