Yields on U.S. Treasury bonds jumped on Friday, extending one of the steepest declines in the fixed-income market in seven decades, as investors grapple with the twin concerns of soaring inflation and rising inflation. debt-fueled attempts to revive economic growth.
Benchmark yields on 2-year Treasury bills, which traded as low as 26 basis points in September last year, were set at 4.195% – the highest since late 2007 – at the start of the month. New York on Friday as traders reset Federal Reserve bets on rate hikes following a series of hawkish comments from Chairman Jerome Powell earlier this week.
This puts the yield spread on 10-year Treasuries, which were last seen at 3.754%, at around 44 basis points, a deeper “inversion” in the yield curve that often signals a recession.
According to a study by the San Francisco Federal Reserve, a sustained inverted yield curve preceded all nine recessions the US economy has experienced since 1955, making it an extremely accurate barometer of financial market sentiment.
In fact, U.S. Treasury bond yields have risen more than 110 basis points since Aug. 1, Bank of America noted in its weekly “Flow Show” report on Friday, helping to put global bond markets on pace. their largest annual declines in more than seven decades. .
What BofA calls a “bond crash” could “threaten credit events and the liquidation of the world’s most crowded deals: long US dollar, long US tech and long private equity.”
“Real capitulation is when investors sell what they love and own,” BofA said.
The Fed’s seemingly singular hope of avoiding a so-called “hard landing” in its fight against inflation – a resilient labor market – is also beginning to falter. Weekly jobless claims have missed analysts’ forecasts for nine straight weeks and reached 213,000 for the period ending September 17.
The Fed itself sees unemployment rising to 4.4% by the end of next year, a move it hopes can moderate wage growth and keep inflation from taking hold. deeper into the American economy.
Fixed income traders are also betting on another 75 basis point Fed rate hike in November, according to CME Group’s FedWatch, while the Atlanta Fed’s GDPNow forecasting tool suggests growth of the third quarter slowed to just 0.3%.
“It’s possible for the jobless rate to creep up and wages to cool without an outright recession, but that’s never happened before,” said Bill Adams, chief economist at Comerica Bank in Dallas.
“Historically, increases in the unemployment rate of the magnitude the Fed wants to see have coincided with a recession, which means notable declines in jobs, incomes, production and sales, widespread across the economy and that probably last more than a few months,” he added.
Elsewhere, bond markets are reacting to both weaker economic activity data, which signal a near-term recession in Europe and the UK, as well as the new UK government’s focus on cuts taxes and additional borrowing to cushion the impact of its living crisis cost.
Europe’s PMI readings, which measure the sentiment of business and operational managers in the region, have fallen below 50 points for three consecutive months, including September, suggesting that the largest economic bloc in the world is probably already in a recession.
“The third quarter clearly marks a turning point for the eurozone economy,” said ING senior economist Bert Colijn. “After a strong rebound from contractions caused by the pandemic, the economy is now more severely affected by high inflation at both consumer and producer levels.”
“The manufacturing sector bears the brunt of the problems,” he added. “Supply chain issues are still disrupting production, but weaker global demand has led to lower backlogs as new orders decline rapidly.”
In Britain, Finance Minister Kwasi Kwarteng, in his first budget statement under new Prime Minister Liz Truss, unveiled plans to borrow an additional $80 billion to pay for both reduced tax levies and a ceiling forecast on energy costs for domestic consumers.
Benchmark 5-year state gilts, the equivalent of a Treasury note, suffered their biggest single-day decline since 1991, while the pound slumped to a new 37-year low at 1.1160 against the dollar.
“The sale of UK assets reflects the sheer panic as the new government’s stimulus package will not only increase an already large debt burden, potentially to unmanageable levels, but will also add to inflationary pressures,” said Fiona Cincotta, Senior Financial Markets Analyst at City Index based in London.
“The Bank of England, which has been reluctant to raise rates aggressively, will have to roll up its sleeves and fight inflation with bigger rate hikes,” she added. “Expectations of a 1% hike in November are already rising.”