US Treasuries sold off on Friday as hawkish comments from Federal Reserve officials this week prompted major Wall Street banks to forecast a faster pace of rate hikes.
The yield on the 10-year US Treasury bond rose a whopping 0.13 percentage points to 2.5 percent on Friday, the highest since May 2019, as benchmark debt fell. The Treasury market, which supports the cost of corporate and consumer credit globally, is having its worst month since Donald Trump’s election in 2016.
New York Fed Chairman John Williams said on Friday that the central bank should take the step if an outsized 0.5 percentage point hike in interest rates was warranted to combat surging inflation. His comments echoed recent comments from Fed Chair Jay Powell and reinforced sentiment that the central bank needs to step up its monetary tightening.
Analysts at Goldman Sachs said Friday they now expect the 10-year yield to hit 2.7 percent by the end of 2022. Analysts at Citi said they expected the Federal Reserve to increase the cost of borrowing by half a percentage point at each of its monetary policy meetings from May through September.
“There is a narrative that the Fed is becoming more restrictive and even more punitive,” said Tancredi Cordero, chief executive officer of Kuros Associates. “It makes the mood unpredictable and volatile.”
The number of quarter-point rate hikes through December, now priced into futures markets, where investors are betting or hedging against moves in the cost of borrowing, rose to 8.2 on Friday from 7.7 the previous day.
“The futures volume is increasing significantly. . . after several members of the Federal Open Market Committee came out, increasing the odds of a 50 basis point rate hike,” said Chuck Tomes, portfolio manager at Manulife Investment Management.
Tomes also said part of the move could be due to investors rebalancing their portfolios ahead of next week’s quarter-end and heading into the weekend, as a dramatic shift in conflict in Ukraine could sideline them over the weekend.
Some investors also pointed to a lack of liquidity — or the ability to trade at scale without moving the market — compounding the sharp shift in yields.
“Liquidity in the market is extremely low and volatility is extreme,” said Gennadiy Goldberg, rates strategist at TD Securities.
In equities, Wall Street’s S&P 500 and Europe’s Stoxx 600 were little changed. The benchmarks should end the week with modest gains.
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