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Government Bond Yields Soar On Rate Hike And Recession Fears

By Investing.com (Darrell Delamaide/Investing.com)BondsJun 14, 2022 05:06AM ET
www.investing.com/analysis/government-bond-yields-soar-on-rate-hike-and-recession-fears-200625715
Government Bond Yields Soar On Rate Hike And Recession Fears
By Investing.com (Darrell Delamaide/Investing.com)   |  Jun 14, 2022 05:06AM ET
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Yield on the benchmark 10-year Treasury soared more than 20 basis points on Monday, rising to 3.37% as bond investors bet the Federal Reserve would have to get more aggressive about hiking interest rates.

US 10-year Weekly Chart
US 10-year Weekly Chart

In addition to the 50 basis-point hikes expected this week and in July, consensus is growing that a fourth hike at that level will be needed in September.

US 2-Year Weekly Chart
US 2-Year Weekly Chart

Yield on the two-year Treasury, which tracks the Fed policy rate more closely, also rose sharply, hitting 3.28% in late trading. At one point, the two-year yield topped that of the 10-year in a phenomenon known as yield-curve inversion, which can signal a recession when it is prolonged.

US 10-2 Year Yield Curve (Weekly)
US 10-2 Year Yield Curve (Weekly)

This didn't last very long, as the 10-year yield kept rising more quickly to restore the yield curve to a more normal trajectory.

But jittery investors are clearly expecting the worst as inflation shows little sign of easing anytime soon. Headline CPI last week was up 8.6% on the year in May, and 1.0% on the month. Core CPI was 6.0% on the year and 0.6% on the month.

Barron’s calculates its own Basics CPI with heavy doses of food, shelter, gas, and utilities—many of which are left out of core CPI. The Barron’s figure showed prices rising 17% on the year and 2.5% on the month—horrendous rates which Fed interest rate hikes can do little to dampen.

Claims that peak inflation has arrived are proving about as reliable as the claims about peak oil, and investors should remain skeptical.

European Markets Sell Off; Yields Rise

Investors in European stock and bonds are also gripped by recession fears. A sell-off Monday hit both as stocks fell more than 2% and bond yields in weaker economies rose sharply.

Italy 10-year vs Germany 10-year spread (Weekly)
Italy 10-year vs Germany 10-year spread (Weekly)

Yields on Italy’s 10-year bond went above 4% for the first time since 2014, widening the spread with Germany’s 10-year yield to 240 bps, the biggest since May 2020.

Expectations of European Central Bank rate hikes have risen as well. After looking for just a couple of quarter-point hikes this year based on earlier ECB guidance, investors now expect a 125 bps in hikes by October, possibly with two 50 bps hikes in July and September and a quarter-point increase to follow.

This defies guidance from ECB President Christine Lagarde as late as last week, even after she turned a bit more hawkish from her earlier stance that multiple rate hikes were not necessary in Europe.

Investors also worry about the lack of any policy on support for bonds, especially those of the weaker economies. The current program of new bond purchases is drawing to a close, ending a support for government bonds that dates back to 2014.

The result should be further widening of spreads, with the dangerous fragmentation that poses. On Monday, Italy torpedoed a plan by Eurogroup chief Paschal Donohoe, the Irish finance minister, to cap bank holdings of government bonds. Italy is particularly vulnerable on this score.

French government bond yields also rose on Monday, after the first round of voting in legislative elections indicated French President Emmanuel Macron may not win a majority in parliament. Based on the first-round results, Macron’s centrist alliance could win 260 to 295 seats, with 289 needed for a majority.

The rival leftist alliance under Jean-Luc Mélenchon could get 160 to 210, but the actual results in the second round next Sunday will depend on the direct vote for candidates in each district. Yield on the French 10-year bond rose on Monday by 15 bps to 2.24%.

Government Bond Yields Soar On Rate Hike And Recession Fears
 

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Government Bond Yields Soar On Rate Hike And Recession Fears

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Comments (3)
Dušan Jovanović
Dušan Jovanović Jun 14, 2022 10:09AM ET
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many
Don Vo
Don Vo Jun 14, 2022 7:34AM ET
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Sell stock then Buy bond now, market crashes
Dušan Jovanović
Dušan Jovanović Jun 14, 2022 7:34AM ET
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please 50$
Dušan Jovanović
Dušan Jovanović Jun 14, 2022 7:34AM ET
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179858
jason xx
jason xx Jun 14, 2022 5:49AM ET
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Fed is not doing more then 50 point hikes like jpow has clearly said and they are not going to make a decision about what they will do 2 or 3 meetings from now. core cpi did moderate and I don't think the fed is as surprised about headline cpi as the market is. with lockdowns in China all month, oil and food costs soaring because of Ukraine even a 1% rate hike will do little to fix those things but it will do a lot to hurt the economy.
Nick Burns
Nick Burns Jun 14, 2022 5:49AM ET
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yeah but people are emotional and don't care about facts or how things work they just want the lie and the lie is the more you raise rates the faster you fix the economy and if the fed doesn't raise then everything will fall apart. Of course thats not true or going to happen but watch when the fed says no we are sticking to .50 rate hike the market will probably do what its been doing run up a 100 or so points on the S&P and then the next day sell it back off lol just stupid
Ali Esmaeil
Ali Esmaeil Jun 14, 2022 5:49AM ET
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Ok no 75 points but they can still reconsider pausing in September as they hinted earlier
 
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