Investors are on edge as concerns over inflation in the United States intensify, with many bracing for the 10-year U.S. Treasury yield to breach a 16-year high of 5% reached last October.
In recent weeks, bond yields have surged, fueled by signs of persistent inflation that are undermining expectations for how much the Federal Reserve can cut interest rates without exacerbating consumer prices. The benchmark 10-year note yield has risen by 80 basis points this year, reaching 4.70%, its highest level in five months.
Anticipating further bond weakness, many investors are reducing their fixed income allocations, with global fund managers’ fixed income investments at their lowest level since 2003. Hedge funds, in particular, have increased bearish Treasury positions to the highest level of the year.
According to Don Ellenberger, a senior portfolio manager at Federated Hermes, the primary driver behind these market movements is inflation. He has adjusted his portfolio to lower interest rate sensitivity, wary that persistent inflation and a robust labor market could push yields up to 5.25%.
Recent data indicating a resurgence in inflation, such as the Personal Consumption Expenditures (PCE) price index, have fueled expectations of minimal rate cuts by the Fed this year, contrasting sharply with initial forecasts.
The looming release of PCE data for March and the upcoming conclusion of the U.S. central bank’s monetary policy meeting on May 1 may provide further insights into the economy’s trajectory.
The surge in Treasury yields is closely monitored as it can translate into increased borrowing costs and tighten financial conditions, potentially impacting consumer spending and corporate investments.
While some investors see the bond market weakness as an opportunity to increase fixed income holdings, others remain skeptical about inflation cooling anytime soon.
Arthur Laffer, president of Laffer Tengler Investments, is bearish on longer-dated Treasuries, predicting yields could climb as high as 6%. Similarly, Michael Purves, head of Tallbacken Capital Advisors, suggests that if inflation continues to rise due to increased prices for commodities like oil, the 10-year Treasury yield could reach its 2007 high of 5.22%.
Fiscal concerns, including rising debt levels, and the anticipation of higher term premiums could further propel yields upward, according to market analysts.
Despite these apprehensions, some investors believe that a return to 5% yields would represent a peak, suggesting that the Fed is unlikely to pivot towards rate hikes and that the overall inflationary trend may stabilize or decrease.
