Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Conflicting Worries On Rates And Growth Roil Government Bond Markets

Published 04/26/2022, 04:59 AM
Updated 09/02/2020, 02:05 AM

U.S. Treasury investors are on a roller coaster as yields climbed on interest-rate fears and then plunged on growth worries.

US 10-year Weekly Chart

Remarks last week by Federal Reserve Chairman Jerome Powell about more aggressive monetary tightening sent yields on the benchmark 10-year Treasury up to near 3% on Friday, only to plummet more than 9 basis points on Monday on concerns about COVID-19 outbreaks and lockdowns in China. The yield reached 2.81% in late trading.

US 10-2 Year Yield Curve

The flight into safe-haven investments lowered Treasury yields across the curve. The two-year note yield also shed about 10 bps on Monday to hit 2.615% in late trading.

The rise in U.S. Treasury prices—yields move inversely to prices—mirrored the sharp decline in equities as stocks continued their decent from last week. Stocks turned upward in late trading as bargain-hunting set in. Twitter's (NYSE:TWTR) acceptance of a $44 billion takeover by Elon Musk contributed to the turnaround in stocks.

Meanwhile, Beijing residents turned to panic-buying as they feared Shanghai-style lockdowns were coming to the Chinese capital. Slowdowns in China would be a further drag on a global economy already hammered by the Ukraine war and its consequences.

Even so, Treasury yields are still high and the trend is upward. After blowing past the 2%-yield hurdle on a sustainable basis in March, the 10-year Treasury note seems to have set its sights on 3%.

The 10-year breakeven inflation rate—a market measure of average inflation expectations over the next 10 years—has topped 3% as investors worry that the Fed may not be successful in curbing inflation (or may not even try real hard).

However, economists at Dutch bank ABN Amro look for the 10-year yield to head towards 2.7% in the course of 2022, on the premise that investors have overshot on their expectations of central bank rate increases.

In short, there’s a lot of uncertainty about where things are headed.

European Bond Market Concerns Mirror Treasuries'

In Europe, the electoral victory of incumbent French President Emmanuel Macron Sunday was widely expected and largely priced into financial markets. The premium on French 10-year bond yields had narrowed to 42 basis points by Friday as Macron’s poll lead widened.

US/France 10-year Premium

That measure of relative risk widened slightly on Monday. Some analysts see it widening further, perhaps by another 10 bps.

French parliamentary elections in June further complicate the picture as Macron’s political opponents immediately switched their emphasis to denying his upstart Republic on the March party a majority that would enable him to push through his pro-business agenda.

If they are successful, it could usher in a return to the so-called cohabitation arrangement, with a potentially hostile government determined by parliament limiting the president’s power.

Otherwise, European government bonds reflected the same growth concerns as in the Treasury market, particularly regarding the possibility of Beijing lockdowns. The yield on Germany’s 10-year bond fell below 0.83% before recovering to 0.85% in late trading, well below the 0.96%-plus posted late Friday.

The yield on the 10-year UK gilts, or government bonds, followed a similar pattern. Poor liquidity in the gilt market may induce the Bank of England to hold off on selling its nearly £850 billion gilt portfolio, as it continues to raise its policy rate and has stopped reinvesting maturing bonds.

Latest comments

Inflation is an important monetary tool to bring down both fiscal deficit and Debt/GDP down to more reasonable levels. As inflation is essentially reduces the value of money, it is a fair tax - and one which cannot be avoided. Given the huge deficits run up in the pandemic, the fastest way to bring these under control is for the Fed to taper inflation from 7% to 2% over a 3-4 year span - let the real interest rate on 10 yr bonda be negative till 2025
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.