For investors in the longest held Treasurys, the last three months have been as bad as the “taper tantrum” fall in government bonds in 2013. Just like in 2013, The concern is, or at least not that much, that the Federal Reserve will raise interest rates and kill the economy. Buyers have decided that locking up their currency for a decade or more in Treasurys is now more risky than before, as there is a much greater chance that high inflation will erode the value of income. fixed entry.
The value of the 30-year Treasury Department fell 15.6% in just three months. That equates to nearly a decade of revenue he offered three months ago, and is the flip side of the sudden rise in output. Shorter-maturing Treasurys have fallen smaller, but even for the 10-year note it will take six years of income to recoup the losses of the past three months.
The danger is that this is just the beginning.
Part of the answer to the Treasury’s long-term outcome is to be simple – expect future rates. Economists can forecast inflation, predict the path of Fed increases in the future and so make informed estimates about this. True, they are not very good at it. But at least these predictions don’t change very quickly, and a turnaround in Fed policy can be introduced.
But there is another part to it, and that is the danger that the prophecies will be wrong. That risk can change dramatically – and it seems to be doing just that. Put simply: Investors still expect the Fed to keep rates very low for a very long time. But they are concerned about the risk that stimulus-driven inflation could push back results.
A few basic things. To compensate for the risk that rates or inflation will not come out as expected, Treasury investors want additional yields. What they want (and sometimes that “extra” piece is negative!) Is driven either by emotion or – as in 2013 – changes in Fed bond purchase plans. In addition to moving quickly, there is no limit to how far it can move, as there is little understanding of what drives this risk factor, which is known to owners money as the main price.
It’s not easy to work out, either. Different models used by the Fed Board of Governors and the New York Fed cannot even agree whether it is currently positive or negative. But both models, and several other approaches, show that the 10-year yield increase this year has been more about the high risk price of the higher-than-expected Fed levels. .
Bond investors don’t think runaway inflation is a difficult decision. A steady rise in the market’s five-year equilibrium rate, in fact the forecast of consumer price inflation, reached its highest level since 2008, but remains at just 2.54%, not far off. from the Fed’s target (the Fed is aiming for a 2% forward divergence that on average since 1990 has been 0.43 percentage points lower than consumer price inflation). But the probability of average inflation above 3% for the next five years has reached 30%, the highest level since the taper tantrum, reflecting the growing uncertainty about the impact of stimulus coupled with money easy.
Volkswagen and other rolling stock are more sensitive to the economic cycle than to bond yields. Volkswagen electric motor factory in Germany last year.
Photo:
Krisztian Bocsi / Bloomberg News
This affects other assets. Investors who want a higher reward for taking inflation risk naturally will be willing to pay more for stocks and commodities that may hedge against that risk, while higher yields affect the value of assets that depend on low yields.
Cycling stocks that are sensitive to economic growth such as car manufacturers and wholesalers provide a higher level of protection against higher inflation created by faster growth, and are less likely to be hurt many with higher yields; something like this applies to industrial and consumer products such as copper and oil. They are all up a lot this year. Gold is not as good, because it suffers from the higher inflation yields created by the rapidly rising term price, taking off its benefits as an inflation hedge – and it is down 9% this year. Large tech stocks are hurting by higher yields, too, one reason the sector has lagged behind the general market this year.
Of course, just because fear is starting to appear in Treasurys does not mean that output is going to rise any further; there is no such thing as one-way trading. Investor sentiment often returns sharply, and after such a large move it is plausible that there will be a short-term reversal, which for bonds would push yields back down and prices up.
But it’s easy to believe that inflationary concerns will grow as stimulus studies begin, and those who have blindly used Treasurys as a ballast for their records may be rethinking. Rising yields would again challenge Big Tech and similar growth stocks, and could slow down the entire market.
As Matt King, global marketing strategist at Citigroup, said: “If it ‘s just about getting better, that’ s positive for equities, but if it ‘s about risk risks coming back, egg. ”
Federal Reserve Chairman Jerome Powell tells WSJ’s Nick Timiraos that there is no plan to raise interest rates so that labor market conditions are consistent with the highest employment rate and inflation is stable at 2%. Photo: Eric Baradat / Agence France-Presse / Getty Images.
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