Bonds Rallying Back From Brutal Year Show Power of Higher Rates

Wall Street is finding a reason to keep plowing into the bond market, even with a Federal Reserve that’s still far from declaring victory in its war against inflation.

The selloff that hit investors with record-setting losses during the first 10 months of the year also brought a stark end to an era of rock-bottom interest payments on Treasuries by driving yields to the highest in over a decade.

Those coupon payments, now over 4% on recently issued 2-year and 10-year notes, have become large enough to lure in buyers and are seen as providing a buffer against future price declines. The resilience of the economy is also strengthening the case: If the Fed needs to tighten monetary policy so much that it sets off a recession, Treasuries will likely rally as investors seek somewhere to hide.

“The coupon is becoming a more meaningful source of return now,” said Jack McIntyre, a portfolio manager at Brandywine Global Investment Management. “The bond math is turning into a tailwind.”

The bond market gained support Wednesday when Fed Chair Jerome Powell indicated that the central bank its likely to slow the pace of its rate hikes at the Dec. 13-14 meeting.

The comments added fuel to a rally that began earlier in November after the rate of consumer-price inflation slowed. That sent a Bloomberg index of Treasuries to a more-than 2% gain for the month, the first advance since July and the biggest since March 2020, when the start of the Covid pandemic in the US spurred a rush into the safest assets.

Powell’s tempering of his hawkish tone boosted demand from investors seeking to lock in current yield levels or close out short bets against bonds.