US bond market torn by inflation

US bond market suffers from “inflation with recession”

Tremors in the Treasury bond market are reflecting an uncertain future for the US economy, and hinting at slower growth and persistent inflation.

The US Treasury Department issues loans in the form of bonds. The yield curve is determined by the yields on short-term and long-term bonds. Photo: AFP

Worry of “inflation with recession”

After rallying at the start of the year spooking markets, US Treasury yields fell sharply as investors shifted focus fear on inflation to the recovery of economic activities in the US may slow down.

In the 1970s, the combination of two factors, higher prices and lower growth, was defined as “stagflation”. Inflation with recession is disturbing but little-noticed fact in the US since inflation has been well controlled over the past few decades.

However, the term “inflation with recession” is mentioned more and more as the US growth picture becomes more gloomy.

“The bond market is trading in a state of inflation and recession,” said Aneta Markowska, chief financial officer at multinational investment bank Jefferies (New York). “There is an argument that these price hikes will destroy demand, lead to policy missteps and ultimately slow growth,” he said. Aneta Markowska said.

Female expert of Jefferies Bank He also said that trading in the context of inflation and recession caused 10-year Treasury yields to slide from a peak of 1.75% set at the end of March to 1.18% at the beginning of this week. a mistake. Yields on US Treasuries are moving inversely with prices.

Ms. Aneta Markowska assessed, Strong consumption and impending supply will reverse the current bottleneck that has caused prices to surge to their highest levels since before the 2008 financial crisis, while also creating more momentum. force to maintain growth without causing inflation.

Therefore, the US Federal Reserve (Fed) will stay on the sidelines until at least 2023, even if the Fed announces an adjustment of the roadmap to raise interest rates earlier by the end of 2022 after the recent price hikes.

Forecasts are in agreement that the US economy will grow at 3%, and Mrs. Markowska said that the US economy could grow 4% to 5% next year.

Growth expectations are low

Bonds are often considered the “more sober component” of US financial markets and are generally opposed to stock market performance.

10-year U.S. Treasury bills are considered fixed income. Like interest rates, Treasuries are the “barometer” of the US economy. Even if US Treasury yields recovered to 1.29% on July 21, this does not represent much confidence in the growth trajectory of the world’s largest economy.

“Our view is that growth and inflation will be moderate,” said Michael Collins, senior portfolio manager at PGIM Fixed Income.

“I don’t care what growth and inflation are this year, what matters to our 10-year Treasury outlook is how it goes over the next 10 years. And I think it will. downward”, Mr. Michael Collins said.

As the US economy just emerged from the Covid-19 lockdowns, GDP was much higher than the usual 2% growth since the end of the 2009 Great Recession. The Covid-19 recession- 19 is probably the shortest US recession on record to date, as the economy has grown tremendously since mid-2020.

However, Mr Michael Collins suppose, I think level growth “modest” of America as before will return, in the hope that investors can get better yields.

“The United States will continue to be at the forefront of global growth and economic dynamism,” Collins said. “But 1.5% to 2% is the limit to US growth unless there is some miracle in terms of productivity,” added the PGIM Fixed Income expert.

Inflation will persist longer than forecast

The consumer price index in June in the US increased by 5.4% while the producer price index jumped to 7.3%. Both indicators suggest that price pressures continue, even as Fed Chairman Jerome Powell asserts that the agency has been more aggressive and persistent in fighting inflation than he and his colleagues had expected. .

Although the slide in US Treasury yields shows that market somewhat appeared the worry and any sign after that would indicate that inflation will persist longer than predicted by US policymakers. This can cause investors to rush to change their thinking and investment strategies.

The above factors increase the risk of the specter of “inflation with recession”. The biggest concern about US growth now focuses on the threat posed by Covid-19 and the Delta variant of this virus. Slowing growth and rising inflation can be a “deadly danger” in the current investment landscape.

“If Covid-19 spreads rapidly again, this will stifle economic growth and prolong supply chain disruptions that cause inflation, which has already affected many industries, including: semiconductors. and housing,” warned Nancy Davis, founder of Quadrate Capital Management.

“Recession inflation poses a greater risk to investors than normal inflation,” added Nancy Davis.

Considering the current situation, ohMichael Collins of PGIM Fixed Income thinks that the 10-year US Treasury yields are trading around fair value.

The U.S. Treasury bond market is generally much more stable and cautious than the equity market, which can swing wildly on both good and bad news. At current yields, investors keep prospects be careful with US bond market.

“Given what has happened in the last 18 months and the problems many people around the world face over the next 2-3 years, a 10 year level of 1.2% (yields on Treasuries) is the best easy to understand,” predicts Nick Colas, co-founder of data and market research firm DataTrek Research.

“That doesn’t mean the stock market will face a rough patch for the rest of 2021 or crash. It does mean that US Treasuries have a healthy response to the downturn. history, especially with inflation always below the level of the past decade”, the expert of DataTrek Research commented.