Treasury 10-year yields edged above 4.5% for the first time since 2007, underscoring how this week’s Federal Reserve meeting is cementing the higher for longer policy rates outlook.
Bond investors face a third year of losses after the US central bank once again raised its projections for future borrowing costs. Every benchmark Treasury bond maturity has hit the highest level in more than a decade this week, with the prospects that yields will keep advancing.
“I have long been arguing that investors should prepare for a reversion to the ‘old normal’ of higher rates — which was the long-term norm before the exceptionally loose policies that followed the global financial crisis and the pandemic,” Sonal Desai, fixed income chief investment officer at Franklin Templeton, wrote in a note.
The US’s “fiscal outlook poses further upside risk to yields in the medium to long term,” she added. “Financial markets have started to accept this, but in my view, the adjustment process will take longer and bring more volatility.”
Third Year of Losses?
The 10-year yield rose almost 1 basis point to 4.5023% before paring on Friday in Asia trading. That on the 30-year bonds climbed one basis point to 4.58%, adding to the 13 basis point gain on Thursday that took it to the highest since 2011.
A Bloomberg index shows the Treasury market is down 1.2% this year, after it peaked in April when it was up by more than 4%. This follows declines of 13% and more than 2%, respectively, in the preceding two years.
The pain isn’t over even if the Fed stops raising interest rates, according to Bill Gross, the former chief investment officer of Pacific Investment Management Co. He expects the central bank to refrain from further hikes, but sticky inflation and widening deficits will drive losses. His views were written in an outlook before the Fed’s meeting Wednesday.
The Fed’s so-called dot plot of projections shows policymakers plan to raise their target rate again by year’s end to a range of 5.5%-5.75%. That would mean a total increase of 125 basis points for 2023, whereas swaps traders at the end of last year were pricing in one more increase at most.
“Following hawkish Fed and BoE pauses, markets are fully on board with higher for longer,” Societe Generale SA strategists including Adam Kurpiel wrote in a note. “If the BoJ gives any hints about possible rate hikes later this year, the bond selloff could continue,” they said. The Bank of Japan will announce its policy decision later Friday.
“Barring a sizable equity correction or swift collapse in economic data, yields could test current levels for some time before gradually declining,” the analysts said.
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