Written by David Randall
NEW YORK (Reuters) – As U.S. inflation concerns grow, some investors are bracing for the yield on the 10-year U.S. Treasury note to top 5%, the 16-year high hit last October.
Bond yields, which are inversely proportional to prices, have risen in recent weeks as signs of persistent inflation dampened expectations of how deep the Federal Reserve can cut interest rates without further stimulating consumer prices. The yield on the benchmark 10-year Treasury note has risen 80 basis points since the start of the year, most recently hitting a five-month high of 4.70%.
Many investors are predicting further declines in bonds. Global fund managers' bond allocations have fallen to their lowest level since 2003, according to a new study from BofA Global Research. Bearish Treasury positioning among some hedge funds is at its highest level this year compared to other assets, according to BofA data. Managers are increasing their bullish bets.
“It all boils down to one word: inflation,” said Don Ellenberger, senior portfolio manager at Federated Hermes. “If the market doesn't see any signs of subduing inflation, there's no reason why yields can't continue to rise. ” he said. He has reduced the interest rate sensitivity of his portfolio, warning that persistent inflation and a strong labor market could push yields as high as 5.25%.
Data released Thursday showed the personal consumption expenditure (PCE) price index, which excludes food and energy, rose much more than expected in the first quarter, providing further evidence that inflation is heating up again. It was announced on Thursday. Futures markets showed investors now expect the Fed to cut interest rates by just 35 basis points this year, compared to more than 150 basis points priced in early 2024.
March PCE data will be released on Friday, and if inflation reaches high levels again, the window for expectations for rate cuts this year could narrow even further. Further economic insight could come at the end of the US central bank's monetary policy meeting on May 1.
“High Water Mark”
Market participants are closely monitoring the level of U.S. Treasury yields, as rising yields could lead to higher borrowing costs for consumers and businesses, tightening financial conditions in the economy.
A sharp rise in yields in late 2023 caused a decline in the S&P 500 index, but stocks rebounded when yields reversed. Stock market gains this year have slowed in recent weeks as yields rise, with the S&P 500's year-to-date gain of more than 10% narrowing to around 6%.
Some investors have taken advantage of weaker bonds to increase their bond holdings, and unless the Fed signals its intention to raise the benchmark overnight interest rate again from its current range of 5.25% to 5.50%, yields could rise even further. I'm sure the possibility is low. . However, some are skeptical that inflation will subside anytime soon.
“Inflation hasn't come down as much as the Fed thought it would,” said Arthur Laffer, president of Laffer Tengler Investments, who is bearish on long-term Treasuries and thinks yields could rise to 6%. “Currently, we are not being rewarded for taking risks in the bond market.”
Michael Purves of Thorbakken Capital Advisors said it is “unthinkable” that the 10-year Treasury yield could reach its 2007 high of 5.22% if high prices for oil and other raw materials continue to push up inflation. It's not something that can't be done.”
Brent crude oil prices have risen about 17% since the start of the year, despite falling last week as concerns about escalating conflict in the Middle East eased.
Fiscal concerns are another factor that could push yields higher. Ratings agency Fitch downgraded the U.S. credit rating last year, partly due to concerns about rising debt levels. Many investors expect an increase in the term premium, or the fee required to hold long-term debt.
“If the U.S. fiscal situation starts to become an issue and the market starts to become concerned, it could put a lot of pressure on yields in the short term and push down stock valuations,” said senior portfolio manager Bryant Bankronkite. “There is,” he said. At Allspring Global Investments, he expects the 10-year Treasury yield to rise above 5%.
Still, Alex Christensen, a portfolio manager at Columbia Threadneedle Investments, which is overweight in two-year bonds, said there is reason to think a return to 5% yields would be a “water mark” for investors. .
Mr. Christensen said the prevailing market view since the Fed's so-called reversal in December was “very one-sided, leaving little room for change in the inflation trend.”
He thinks the Fed is unlikely to raise interest rates.
“We believe the overall inflation trend will be stable to declining,” he said.
(Reporting by David Randall; Editing by Ira Iosebashvili and Paul Simao)
