But longer-term bonds were hit the hardest. The iShares20+Year Treasury Bond exchange-traded fund lost more than 9 percent of its total return.
The worst streak in 65 years
Analysts estimate that on an annualized basis, long-term US bonds are in their worst period in 65 years.
Investors, who invested in bonds late last year – expecting a sharp decline in U.S. inflation and interest rates this year – were wrong-footed as inflation has proven to be a more recalcitrant enemy than expected.
Last January, investors were betting that the Fed would make six rate cuts of at least 25 basis points this year.
They expected the sharp decline in official interest rates to lower yields and push up bond prices, rewarding investors with capital gains and interest income.
Rate cut prospects darken
But as inflationary pressures show signs of strengthening rather than receding, the outlook for U.S. rate cuts this year has darkened.
Investors are now wondering whether the Fed will cut rates this year unless the strength of the U.S. economy changes.
Given the strength of the labor market and the progress made so far on inflation, it is appropriate to give restrictive policy more time to act.
The “higher for longer” scenario hurt bonds, with the yield on US 10-year bonds rising from 3.88 percent at the end of 2023 to 4.67 percent.
Bond market pessimism was reinforced on Tuesday evening (Wednesday AEST) when Jerome Powell, who heads the powerful US Federal Reserve, downgraded his expectations of three rate cuts this year.
Fed officials previously said they were waiting for evidence that inflation was sustainably returning to the central bank’s 2% target before cutting rates.
“Recent data clearly has not given us greater confidence and instead indicates that it will likely take longer than expected to achieve that confidence,” Powell said in Washington.
A resilient global economy
He added that the strength of the US economy, combined with the strength of the jobs market, meant the Fed could keep interest rates at their current level – a 23-year high between 5.25 and 5 .5 percent – longer than expected.
Powell said he would keep interest rates at their current level “as long as necessary” given stubborn inflation.
U.S. consumer prices rose 3.5 percent in the year through March, the third straight month of higher-than-expected inflation figures.
“At this time, given the strength of the labor market and the progress made so far on inflation, it is appropriate to allow more time for restrictive policy to take effect,” Powell said .
His comments came as the International Monetary Fund said the global economy had proven remarkably resilient, but inflation, although receding, had yet to be brought under control.
The IMF raised its forecast for global economic growth by 0.1 percentage point from its January outlook, to 3.2 percent this year and next.
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