Sleepless Bond Traders Face Worst Start to a Year in Decades
Five-year yields jumped 21 basis points in four days for the steepest new-year increase in almost two decades, spurring a disruptive rout across assets of all stripes, from high-flying tech stocks to cryptocurrencies.
January 07, 2022 at 03:26 PM
5 minute read
Like many on Wall Street, Priya Misra was hoping for a quiet start to the year.
Instead, the interest-rate chief at TD Securities was left reeling as a major Treasury sell-off rocked global markets, thanks to hawkish signals from the Federal Reserve.
Five-year yields jumped 21 basis points in four days for the steepest new-year increase in almost two decades, spurring a disruptive rout across assets of all stripes, from high-flying tech stocks to cryptocurrencies.
A broad measure of Treasuries lost some 1.4% during through Thursday, extending the annus horribilis for investors in the world's biggest bond market. On Friday, Treasuries extended losses after the Labor Department reported that the unemployment rate dropped even as payrolls rose at a weaker-than-expected pace.
"I'm already a bit sleep deprived, which I didn't expect this early in the year," said Misra, who has to juggle between work and a family life that now includes getting her kids tested for COVID before going to school. "So pandemic concerns are still there. But instead of lower rates and Fed easing, we are grappling with how fast the Fed exits and how high rates can go higher. That can make anyone's head spin."
Bearish sentiment gathered force Wednesday when the Fed's December meeting minutes indicated the central bank is poised to take a more aggressive approach in the face of the steepest inflation since the early 1980s.
"It's been a bit of wicked market action the last couple of days," said Salman Baig, an investment manager at Unigestion SA.
Traders have been bracing for the Fed to start pulling back the tide of cash it has pumped into markets since the onset of the pandemic, elevating the price of everything from real estate and meme stocks to speculative tech-company shares. But even so, the swift repricing this week caught some by surprise.
Just ask Misra, who heads up TD's interest-rate strategy. Before the release of the Fed minutes Wednesday afternoon, she and her colleagues recommended that clients buy two-year Treasuries. They expected the surge of the omicron variant to dampen the odds of a rate hike as soon as March. Instead, the securities slipped when the minutes suggested the bank may raise rates earlier and faster than previously expected.
The Fed also signaled it may start paring its stockpile of bond holdings faster than it did during last decade's tightening cycle.
In turn, the yield on the benchmark 10-year Treasury this week has surged 25 basis points to about 1.76%. That's already put it above the average forecast among economists and strategists surveyed by Bloomberg that it would hit 1.71% by March's end. The consensus was for the yield to end 2022 at 2.04%.
"The speed of the move in rates has raised some eyebrows," said Gargi Chaudhuri, head of BlackRock Inc.'s iShares investment strategy, Americas.
Those higher yields in the U.S. rippled through the world. German 10-year borrowing costs jumped to the highest since May 2019, while their Italian counterparts surged to a June 2020 high. Rate-sensitive corners of global markets have duly repriced, with the Nasdaq 100 index on track for a 3.4% loss this week.
"I wouldn't say I was surprised at the extent of the Treasury move but it was a pretty hectic start to the year," said Chris Rands, senior portfolio manager at Yarra Capital Management in Sydney. "It really didn't help on the liquidity front too, everyone was still pretty much on holidays. That just exacerbated the moves a lot more."
Investors say the expectation for higher rates is justified by a tighter labor market and above-trend growth. Moreover, even after this week's rise, 10-year yields are still nearly 0.8% below the bond market's expected inflation rate over the next decade, a sign of still-loose monetary policy.
"This selloff is based on real yields, and that tends to get the equity market's attention," said Kelsey Berro, fixed-income portfolio manager at JPMorgan Asset Management. "But it's against the backdrop of still strong growth. It's not sinister. It's a rationale reaction to the Fed's pivot."
During the last rate-hike cycle in the 2010s, the Fed waited almost two years after its first hike to begin trimming its stockpile of such assets, which caused a spike in Treasury volatility and weighed on stocks when it happened. But the Fed's minutes showed that some policy makers favor shrinking its balance sheet soon after raising rates by not reinvesting maturity payments into new securities. That would remove another support for the market.
It's not all bad news though. Rosanna Scarpati, a director at the brokerage Dealerweb Inc., welcomes this week's rout since more volatility means more business. She's fielding more calls from clients on strategies to reduce exposure to interest-rate risk.
"We all expected the rate increases coming into '22," Scarpati said. "But Fed minutes really made it concrete on how much to expect this year."
Ye Xie, Michael MacKenzie and Peyton Forte report for Bloomberg News.
NOT FOR REPRINT
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
You Might Like
View AllRogge Dunn Represents Florida Trucking Firm in Civil RICO Suit Against Worldwide Express
4 minute readTrending Stories
- 1Federal Judge Named in Lawsuit Over Underage Drinking Party at His California Home
- 2'Almost an Arms Race': California Law Firms Scooped Up Lateral Talent by the Handful in 2024
- 3Pittsburgh Judge Rules Loan Company's Online Arbitration Agreement Unenforceable
- 4As a New Year Dawns, the Value of Florida’s Revised Mediation Laws Comes Into Greater Focus
- 5Managing Partner Vindicated in Disciplinary Proceeding Brought by Former Associate
Who Got The Work
Michael G. Bongiorno, Andrew Scott Dulberg and Elizabeth E. Driscoll from Wilmer Cutler Pickering Hale and Dorr have stepped in to represent Symbotic Inc., an A.I.-enabled technology platform that focuses on increasing supply chain efficiency, and other defendants in a pending shareholder derivative lawsuit. The case, filed Oct. 2 in Massachusetts District Court by the Brown Law Firm on behalf of Stephen Austen, accuses certain officers and directors of misleading investors in regard to Symbotic's potential for margin growth by failing to disclose that the company was not equipped to timely deploy its systems or manage expenses through project delays. The case, assigned to U.S. District Judge Nathaniel M. Gorton, is 1:24-cv-12522, Austen v. Cohen et al.
Who Got The Work
Edmund Polubinski and Marie Killmond of Davis Polk & Wardwell have entered appearances for data platform software development company MongoDB and other defendants in a pending shareholder derivative lawsuit. The action, filed Oct. 7 in New York Southern District Court by the Brown Law Firm, accuses the company's directors and/or officers of falsely expressing confidence in the company’s restructuring of its sales incentive plan and downplaying the severity of decreases in its upfront commitments. The case is 1:24-cv-07594, Roy v. Ittycheria et al.
Who Got The Work
Amy O. Bruchs and Kurt F. Ellison of Michael Best & Friedrich have entered appearances for Epic Systems Corp. in a pending employment discrimination lawsuit. The suit was filed Sept. 7 in Wisconsin Western District Court by Levine Eisberner LLC and Siri & Glimstad on behalf of a project manager who claims that he was wrongfully terminated after applying for a religious exemption to the defendant's COVID-19 vaccine mandate. The case, assigned to U.S. Magistrate Judge Anita Marie Boor, is 3:24-cv-00630, Secker, Nathan v. Epic Systems Corporation.
Who Got The Work
David X. Sullivan, Thomas J. Finn and Gregory A. Hall from McCarter & English have entered appearances for Sunrun Installation Services in a pending civil rights lawsuit. The complaint was filed Sept. 4 in Connecticut District Court by attorney Robert M. Berke on behalf of former employee George Edward Steins, who was arrested and charged with employing an unregistered home improvement salesperson. The complaint alleges that had Sunrun informed the Connecticut Department of Consumer Protection that the plaintiff's employment had ended in 2017 and that he no longer held Sunrun's home improvement contractor license, he would not have been hit with charges, which were dismissed in May 2024. The case, assigned to U.S. District Judge Jeffrey A. Meyer, is 3:24-cv-01423, Steins v. Sunrun, Inc. et al.
Who Got The Work
Greenberg Traurig shareholder Joshua L. Raskin has entered an appearance for boohoo.com UK Ltd. in a pending patent infringement lawsuit. The suit, filed Sept. 3 in Texas Eastern District Court by Rozier Hardt McDonough on behalf of Alto Dynamics, asserts five patents related to an online shopping platform. The case, assigned to U.S. District Judge Rodney Gilstrap, is 2:24-cv-00719, Alto Dynamics, LLC v. boohoo.com UK Limited.
Featured Firms
Law Offices of Gary Martin Hays & Associates, P.C.
(470) 294-1674
Law Offices of Mark E. Salomone
(857) 444-6468
Smith & Hassler
(713) 739-1250