The selling pressure in U.S. bonds highlights how the bond market is ‘reflecting the reality’, according to the CEO of one a leading independent financial advisory and fintech.
The surge in the 10-year yield by about 27 basis points over Friday and Monday sent ripples through the financial markets, marking the most significant two-day rise since June 2022.
It follows Federal Reserve Chair Jerome Powell’s pushback against the prospect of an imminent interest rate cut which appears to have caught investors off guard, leading to a swift and pronounced reaction in bond prices.
Short-dated Treasuries, sensitive to rate outlooks, experienced notable losses, with two-year yields surging to a one-month high of 4.46%.
Investors had initially anticipated a rate cut in March, viewing it as a near certainty just four weeks ago. However, Powell’s cautious stance emphasizes the Fed’s commitment to “data-driven decision-making.”
Powell stated in an interview with CBS’s 60 Minutes that the central bank needs more economic data to confirm that inflation is on track to meet their 2% target. This change in tone seems to have prompted investors to recalibrate their expectations and adjust their rate cut forecasts.
“We have been one of the few voices publicly saying that the market expectations were out of sync with what is likely to happen imminently to rates,” said deVere Group’s Nigel Green.
“The bond market’s reaction to Powell’s interview, and economic data, can be seen as a manifestation of the market now reflecting the economic realities,” he explained.
Challenging expectations
“The initial market expectations of a rate cut in March were based on the downward trajectory of inflation. But, as we have been saying for months, the robustness of the US labour market is still challenging these expectations and we don’t see signs of a Fed pivot yet.
“Powell’s insistence on waiting for more economic data underscores the Federal Reserve’s commitment to avoiding premature policy adjustments that could have unintended consequences,” Green said.
The recent acceleration in annual consumer price growth to 3.4% in December adds complexity to the Fed’s decision-making process.
“Powell’s emphasis on confirming the trajectory of inflation aligns with the central bank’s dual mandate of price stability and maximum sustainable employment. The bond market’s response, with yields rising, reflects the shift of expectations regarding the inflationary environment and the Fed’s response,” the deVere CEO said.
The bond market’s adjustment in response to the Fed Chair’s statements underscores the importance of staying attuned to evolving economic data and central bank communications and working with an advisor to best position your investment portfolios.
The deVere CEO concluded that, “the bond market is serving as a mirror reflecting changing perceptions and economic realities.”
