Treasury market crash in 5 charts

An employee of the Korea Exchange Bank counts US one hundred dollar bills during a photo session at the bank’s headquarters in Seoul April 28, 2010. REUTERS/Jo Yong-Hak/File Photo

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NEW YORK, March 25 (Reuters) – The Federal Reserve’s hawkish bias has rattled the bond market, with Treasuries posting their worst start to the year on record.

Benchmark 10-year US Treasury yields, which move inversely to bond prices, hit a high of 2.417% earlier this week as investors factored in a more aggressive Federal Reserve, a gain of 90 basis points since the beginning of the year and its highest level. since May 2019.

Many investors expect more bond turbulence as high consumer prices push the Fed into full-fledged inflation-fighting mode. Goldman Sachs on Thursday raised its year-end forecast for the 10-year yield to 2.7% from a previous projection of 2.25% and forecast a “modest” inversion of the Treasury yield curve, although the analyst at the bank said the phenomenon would not necessarily be indicative of a looming recession, as it has in the past. Read more

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Here’s a quick look at the state of the Treasury market nearly three months into 2022.

Reuters Charts

The ICE BofA Treasury Index (.MERG0Q0) is down 5.6% this year, its worst start ever, as investors price in a Federal Reserve now expected to tighten monetary policy by another 190 basis points this year and has said it could rise rates by 50 basis points at one of your next meetings if warranted.

The inversion of the 2-year/10-year Treasury curve has preceded US recessions.

Investors concerned that aggressive monetary policy could hurt growth have been watching the shape of the Treasury’s yield curve, which has increasingly shown that yields on some shorter-dated debt exceed yields on longer-dated debt. long term. Read more

An inverted yield curve is usually a sign that investors are concerned about the economy and recessions have followed when 2-year Treasury yields have risen above 10-year yields. That part of the yield curve has so far not inverted, although the gap between the yields has narrowed sharply in recent weeks.

Analysts at Goldman Sachs said they expected part of the yield curve to invert this year, although such a move would not necessarily mean a recession given the current “high inflation” environment.

“In such an environment, a deeper nominal curve inversion may be needed to produce the same recession probabilities in models seen in more recent business cycles,” Goldman analysts wrote in a recent report.

Real yields, deep in negative territory since early 2020, have been rising

Investors have also been keeping an eye on so-called real yields, or a bond’s nominal yield minus the rate of inflation.

Negative real yields on Treasuries have enhanced the appeal of stocks and other comparatively risky assets for more than two years, helping support the S&P 500 doubling from its March 2020 lows. However, they have started to rise in recent weeks, reflecting the Fed’s increasingly hawkish stance. That may signal more trouble for the S&P 500, which is down 5.2% this year.

Investors have piled into the TLT iShares 20+ Year Treasury Bond ETF in recent weeks, after withdrawing money earlier this year.

The bond sell-off likely hit investors who had recently piled into Treasuries, a popular safe haven, as geopolitical uncertainty mounted after Russia invaded Ukraine last month. The TLT iShares 20+ Treasury Bond ETF(TLT.O)
– often used by investors to express opinions on the government bond market – saw net inflows for the past six weeks, the longest streak in three years.

Speculative positioning

However, other market segments appear to have positioned themselves for higher returns. CFTC data on Treasury futures, which captures the positioning of hedge funds and other shorter-dated market participants, shows investors have been net-short in 10-year Treasury futures since mid-October.

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Reporting by Saqib Iqbal Ahmed and Davide Barbuscia: Writing and additional reporting by Ira Iosebashvili; edited by Diane Craft

Our standards: The Thomson Reuters Trust Principles.

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