The treasuries market had one of the worst quarters in decades, with the aggregate index of investment grade (IG) bonds down almost 10% year-to-date – an unusual move for the segment. For comparison, the MSCI Word equity index is down by a more moderate 5.8% since the start of the year.
The increases in US bond yields over the past three months were the biggest since the mid-1990s and came on the back of ever-higher readouts of inflation numbers, which forced investors to begin pricing in numerous rate hikes by central banks around the world. By now, the market is pricing two 50-basis-point-increases by June and some Fed officials are even suggesting 75-basis-point-moves. However, while the Federal Reserve is keen to show that it is eager to catch up with inflation dynamics of late, policy makers will also remain intent on keeping the economic recovery intact. Moreover, with a hawkish bias already priced in, any signs of abating price pressures would give central banks a reason to moderate, if not pause, the pace of policy tightening in the future.
The latest inflation data for March, published on 12 April, gave us a first indication of how markets can react to even small hints of peaking price pressures under such circumstances. Specifically, the data showed that the year-on-year gain in the headline US consumer price index hit another multi-decade record of 8.5%, driven mainly by the spike in energy prices, but bond markets rallied in relief because the month-on-month rate in the core index simultaneously fell to 0.3% from 0.5%.
Such responses could become more frequent in coming months especially if inflation begins to moderate by the end of this quarter, as the consensus currently expects.
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Note: The next edition of the LGT Beacon is scheduled for May 2022.