Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your experience. Save up to 40% More details

Bond investors go for safety, brace for ultra-hawkish Fed

Economy May 02, 2022 08:51AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
2/2 © Reuters. FILE PHOTO: U.S. Federal Reserve Chairman Jerome Powell testifies during the Senate Banking Committee hearing titled "The Semiannual Monetary Policy Report to the Congress", in Washington, U.S., March 3, 2022. Tom Williams/Pool via REUTERS/File Photo 2/2

By Gertrude Chavez-Dreyfuss and Davide Barbuscia

NEW YORK (Reuters) - The Federal Reserve's well-telegraphed plan to hike interest rates by half a percentage point on Wednesday and start reducing its balance sheet has failed to ease inflation and growth worries, prompting bond investors to seek safety by adjusting the duration of their portfolios.

Safety trades can mean going short or long duration depending on the perceived risk, asset managers said.

With the U.S. central bank fighting to stem soaring inflation, fed funds futures, which track short-term rate expectations, have priced in at least three 50 basis-point increases this year, with more than 250 basis points in cumulative hikes.

By the end of 2022, the market has priced in a fed funds rate of 2.86%, compared with the current 0.33%.

The Fed is expected to yank two legs out from under the punch bowl, by raising rates again and allowing its nearly $9 trillion balance sheet to shrink by as much as $95 billion per month starting in June, a two-fisted approach that has never been attempted with such intensity.

Ahead of the Fed meeting, many bond investors have maintained holdings of short-duration fixed-income securities, typically anywhere between one- to three-year maturities, as they hedge against an aggressive pace of Fed tightening. Shorter-duration bonds, in general, outperform longer-dated ones in a rising rate environment.

Some investors such as Insight Investment have also opted to go neutral when it comes to duration risk, after being underweight this benchmark for some time.

"There's still a fair amount of uncertainty," said Jason Celente, senior portfolio manager at Insight Investment.

"Will inflation come down? Will the Fed err on the side of running inflation a little bit hotter than what it has been in the past? We think that's probably going to take a little bit of time to play out."

U.S. inflation and wage growth

As inflation expectations escalated and the Fed's reaction to it drastically shifted over the past several months, U.S. Treasuries in 2022 sold off sharply. The ICE (NYSE:ICE) BofA U.S. Treasury Index plummeted 8.2% this year, on track for its worst performance since at least 1997.

The shorter-duration ICE BofA 1-3 year U.S. Treasury Index performed a little better though, with losses of just 2.7% so far in 2022 and 0.3% for the month of April.

"The simplest and lowest-risk solution is simply to reduce or eliminate duration risk," said John Lynch, chief investment officer at Comerica (NYSE:CMA) Wealth Management.

He cited money market fund yields, which have risen from zero to about 0.25% and should continue to rise as the Fed embarks on its tightening program.

Lynch also recommends ultra-short bond funds, with durations of less than one year, delivering better than expected returns than the longer-duration options, with yields rising in the 1.40% range.


Some are also hedging against the possibility of U.S. recession. That view gained traction last week with the contraction in the U.S. gross domestic product for the first quarter.

GDP fell at a 1.4% annualized rate in the first three months of the year, data on Thursday showed. nL2N2WP2ZV]

"The Fed is going to struggle to reach the number of hikes that the market has priced in," said Peter Cramer, head of insurance portfolio management at SLC Management.

"We're already starting to see a lot of the damage from the market expectation of higher rates. The Fed has only hiked once and we're already seeing a negative GDP rate in the first quarter."

Cramer also pointed to the U.S. 30-year mortgage rate which hit 5.37% in the week of April 22, the highest since 2009, which should crimp housing demand. These rates were just under 3% in February 2021.

He believes the U.S. economy could hit recession either in late 2022 or early 2023, which should prevent the Fed from raising rates aggressively.

Cramer's recession call echoed that of Deutsche Bank (ETR:DBKGn).

Smoothed U.S. Recession Probabilities

Deutsche, in a research note, said it sees the Fed funds rate going above 3.5%, plus an additional 0.50% equivalent tightening through the Fed's balance sheet reduction. This is enough, Deutsche said, to push the U.S. economy into a mild recession by late next year and eventually over several more years, which should help bring inflation to more desirable levels.

With U.S. recession risks looming, SLC's Cramer said he has gone defensive by being long duration, particularly in the three-year part of the curve.

Going long duration reflects expectations U.S. yields will fall because the Fed will be forced to cut rates.

Cramer also said his portfolio has also moved up in credit quality and shifted away from credit-sensitive sectors.

"There are some points in time where it makes a lot of sense to have a very aggressive interest rate posturing this way or that, but right now is not one of those times," said Robert Tipp, head of global bonds at PGIM Fixed Income.

Bond investors go for safety, brace for ultra-hawkish Fed

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (3)
Çağatay Çakır
Çağatay Çakır May 02, 2022 9:03AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
They have just told that ‘’50 points will be on the table’’ and since that day everyone is trying to manipulate the decision like they ll care economists. So dangerous media americans have
Millennial Stacker
Millennial Stacker May 02, 2022 9:01AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Bonds are selling off… who writes these articles?
Paulo Levi
Paulo Levi May 02, 2022 7:14AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
ultra hawkish ahhhh....inflation in double digit and interest rates at 0%
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
Sign up with Email