Bonds Extend Drop After Fed Sparks One of Worst Days in Decade

The U.S. bond market reeled further on Tuesday, extending Monday’s declines after Federal Reserve Chair Jerome Powell’s aggressive rate hike comments drove yields on short-dated Treasuries to one of their biggest daily jumps of the past decade.

The central bank chief’s hawkish tone led traders to rapidly ratchet up estimates for how aggressively the Fed will tighten monetary policy this year as rising commodity prices threaten to add fuel to the fastest consumer-price increases in four decades.

His comments on the possibility of a half-point hike, which doubled down on the message he gave after last week’s Fed meeting, sent yields across much of the curve to the highest since 2019. Those on two-year notes rose 5 basis points to 2.17% on Tuesday, after soaring 18 basis points Monday. The gap between 5- and 30-year yields narrowed further to the smallest since 2007, indicating expectations tighter policy will slow the economy or even cause a recession.

The moves compounded what is on course to be the worst quarterly losses the market has seen since at least 1973. The Bloomberg U.S. Treasury Index has lost 5.55% since Dec. 31, surpassing the 5.45% slump at the start of 1980 that stands as the biggest quarterly decline since the gauge’s inception.

The selloff spread to other markets with yields on benchmark Australian and New Zealand bonds surging by more than 10 basis points each and German bund futures retreating.

The severity of the losses underscores the degree to which some investors have underestimated just how far the central bank is willing to go in order to control inflation.

Monday’s yield move was “pretty violent,” said Tracy Chen, a portfolio manager at Brandywine Global. “At the end of last week, investors including us were thinking the long-end looks cheap. But our models can’t factor in the uncertainty about inflation from the commodity price shock.”