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Bond markets facing historic losses become worried about Fed ‘still hasn’t blinked’


The Federal Reserve has shown no sign of giving up on aggressive rate hikes, even as its policies fueled carnage in periods of time. $53 trillion bond market.

Therefore, the borrower from the US government for large corporations and home buyers have been paying the most money access to credit for more than a decade. The result – ultimately – will be lower inflation.

But for many bond investors, keeping credit scores open over the past nine months has meant they’ve endured the steepest shocks from exchange rate volatility of their careers, though. the pain is not over yet.

“We’re buying some treasure because we’re drinking Kool-Aid in the message from the Fed,” said Jack McIntyre, portfolio manager for global fixed income at Brandywine Global Investment Management.

Message from the central bankers was an oath to bring US inflation rate is about 8% down to the Fed’s 2% annual target, through higher interest rates and a smaller balance sheet, even if that means pain for families and businesses.

“But the timing was tough and how much tightening would have to be to break inflation,” McIntyre said. “The Fed doesn’t blink. That’s why more pain can happen right around the corner. “

See: Fed’s Cook favors higher interest rates in the long run

Worst sell-off in 40 years

This year’s dramatic bond revaluation could give investors a much-needed break from nine months of pain.

Much of the impact on bond prices can be tied to changes in exchange rates, including benchmark 10-year Treasury yields,
TMUBMUSD10Y,
3.889%

which lightly touch 4% in September, the highest level since 2010, before falling and recovering to about 3.9% on Friday.

For a more complete picture of the wreckage, the sell-off in treasures from 2020 to July 2022 has been finalized. is the worst in 40 years by researchers at the Federal Reserve Bank of New York, but also the third largest since 1971.

“I don’t think the bond market really knows which way to go,” said Arvind Narayanan, senior portfolio manager and co-head of investment-grade credit at Vanguard. “You are seeing that in the daily volatility. The US bond market should not trade more than 20 basis points in a day.”

Volatility in financial markets can feel far removed from everyday life vibrant job market that the Fed wants to amend. Even so, haven’t sectors like Treasuries are down 12% this year (see chart), while lower risk segments like corporate bonds are at minus -17% as of May 4. 10, on the basis of total profit.

The historic sell-off of 2022.

Bank of the West, Bloomberg

To be sure, stocks fell even further, with the S&P 500
SPX,
-2.80%

down about 23% in the year to Friday, the Dow Jones Industrial Average
DJIA,
-2.11%

down nearly 19% and Nasdaq Composite
COMP,
-3.80%

31% lower, according to FactSet.

Bond yields and prices move in opposite directions. Higher interest rates make low-yield bonds less attractive to investors, while rate cuts boost the appeal of higher-yielding bonds.

“If you continue to see tension in the market and we head into a recession, bonds will most likely appreciate and outperform from here,” Narayanan said of investment-grade corporate yields currently near 5.6. %, or the highest level since 2009, but also that “liquidity will remain high.”

Cracks appear

Large corporations and American households appear to be weathering the interest rate storm that has swept through financial markets, with both groups borrowing or refinancing during the pandemic at historically low interest rates.

But one area that seems more prominent, despite the recent increase in the number of workers reporting direct employment, is the office component of commercial real estate.

See: Commercial real estate woes grow with only 9% of Manhattan office workers returning to the office full-time

“You just have so much space and the world has changed,” said David Petrosinelli, managing director, sales and trading at InspereX, a broker-dealer.

While dealing in securitized products, from mortgage bonds to asset-backed debt, is his specialty, Petrosinelli said debt transactions across credit markets have recently struggled. struggling to cross the line or has been postponed, as release conditions worsen.

“I think it’s a tough row to dig into, especially commercial mortgage bonds with high exposure to office space, or leveraged loans from less profitable companies,” he said. more interest rate increases.

“We haven’t seen anything like a deep recession priced into those areas.”

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