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Tuesday, May 17, 2022

Two-year Treasuries face biggest loss in 38 years

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(Bloomberg) — Short-dated Treasuries hurtled toward their worst quarterly performance in nearly four decades after U.S. Federal Reserve Chairman Jerome Powell’s dovish comments on monetary policy revived the prospect of an extraordinary rate hike of half a point.

Two-year notes led an advance in the US curve, rising five basis points to 2.17% at 8:06 a.m. in New York. It is spread over a period of 2021 at 143 basis points. Meanwhile, money markets are pricing in a 70% chance of a 50 basis point hike when the Fed meets in May.

The moves come after Powell hinted at a more hawkish stance on Monday, prompting traders to rapidly raise estimates of how aggressively the Fed will pursue monetary policy this year.

The impact will harden sharply between 5-year and 30-year yields, which will drop further to the lowest level since 2007, a sign to some that tighter policy will slow the economy or even trigger a recession. Investors are prompted to question the bonds’ ability to offer protection in such a scenario.

extensive losses

More broadly, Treasuries are on track to post the worst quarterly losses the market has seen since at least 1973. The Bloomberg US Treasury Index has lost 5.55% since Dec. 31, outpacing the 5.45 drop % in the early 1980s, which represents the largest quarterly drop since the inception of the indicator.

The tone of Powell’s comments reinforced the view that the main monetary policy concern over the war in Ukraine is that it will worsen inflation and leave it more entrenched in the US economy. That such a risk appears more prominent than a growth slowdown opens the door to tightening policy at a much faster pace towards the bank’s end-2023 target of 2.8% for overnight rates.

While price moves were strongest in the shorter-dated portion of the Treasury market, which is typically more affected by monetary policy tightening, yields also rose at the longer end, including on the benchmark instrument. 10-year bond that serves as a touchstone for global markets, and underpins the cost of borrowing for households and businesses.

original note:

Two-year Treasuries face biggest loss in 38 years at Fed Hawkish

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