There’s good reason for investors to be surprised that the economy hasn’t collapsed yet: The last time U.S. government bond yields climbed so fast, the country was in trouble. back to back economic recession.
The 10-year Treasury yield, a key benchmark for the cost of funds across the financial system, has risen more than four percentage points over the past three years, pushing it above 5% at one point this week for the first time since 2007. That’s the biggest increase since the stock market rally of the early 1980s, when Paul Volcker’s efforts to curb inflation pushed the 10-year Treasury yield to nearly 16%.
In one sense, the similarities are not surprising, as Fed Chairman Powell’s rate hikes were the most aggressive since then. On the other hand, it emphasizes how much times have changed.
In the 1980s, monetary policy shocks triggered two recessions.Now, the economy continues to defy pessimistic forecasts, Atlanta Fed estimate This suggests that it might even grow in its third season.
Of course, policies during the Volcker era were stricter. At the start of the second recession in mid-1981, the “real” 10-year Treasury yield, or the yield adjusted for inflation, was about 4%, adjusted for rising consumer prices, according to data compiled by Bloomberg . Now it’s about 1%.
But the surprising strength of the economy still injects a lot of uncertainty into the market, and bond yields have risen sharply in the past few months on growing confidence that the Federal Reserve will keep interest rates high.
Whether this resilience can be sustained remains to be seen. Billionaire investor Bill Ackman ended bearish bets on long-dated bonds on Monday, explain The economy is slowing down rapidly.
However, this year has started with similar calls, along with expectations that bond markets will rebound as the Fed changes course.
Instead, bond prices continued to fall. The Bloomberg U.S. Treasury Aggregate Index is down about 2.6% this year, extending its decline since its August 2020 peak to 18%. By comparison, the previous worst peak-to-trough retracement was a drop of about 7% in 1980, when the Fed’s key benchmark hit 20%. The sell-off is more painful because interest rates have been low, suppressing income payments that help offset the hit.
Another factor is the sharp increase in the federal deficit, which floods the market with new Treasury debt at a time when traditional big buyers such as the Federal Reserve and other major central banks have scaled back their bond purchases. That’s seen as one of the reasons yields have moved higher in recent weeks, even as futures markets show traders believe the Fed may be done raising interest rates.
“A hard landing is our base case scenario, but I can’t point to any data and say, ‘This is a clear leading indicator of a recession, look at this,'” said Priya Misra, a portfolio manager at J.P. Morgan. .”asset Management
“The conviction rate is very low,” she said. She said investors who had been buying bonds “were hurt.”
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