The Treasury market has made it clear: the Federal Reserve is a downer.
Optimism toward the US economic recovery flourished over the past week. Daily COVID-19 …
The Treasury market has made it clear: the Federal Reserve is a downer. Optimism toward the US economic recovery flourished over the past week. Daily COVID-19 case counts fell further from their January peak. Vaccinations continued across the country, hinting the pandemic could fade in just a few months. Economic data beat expectations. And Democrats pushed forward with President Joe Biden’s $1.9 trillion stimulus proposal, aiming to accelerate the rebound even more. And yet, these encouraging developments fueled a sudden shock in the Treasury market. Investors looking to capitalize on a swift recovery dumped government bonds and pushed cash into riskier assets. The 10-year yield soared as high as 1.614% on Thursday, its highest level since the pandemic first slammed the US. The jump immediately cut into stocks‘ appeal and dragged major indexes lower throughout the week. The narrative behind the move is simple: The increased likelihood of new stimulus juicing the recovery lifted expectations for faster economic growth and inflation. Stronger price growth leads investors to demand higher yields. Yet the market moved to such an extreme that it now stands in contrast with the Federal Reserve’s own forecast. The central bank has indicated it doesn’t expect inflation to reach its above-2% target until after 2023. The outlook suggests the Fed will hold interest rates near zero through 2023. The sell-off in Treasurys, however, signals investors are pricing in a rate hike as early as the second half of 2022. „We’re now getting to the point where the market isn’t necessarily believing what the Fed is telling,“ Seema Shah, chief strategist at Principal Global Investors, told Insider.
