Traders Can’t Get Enough of Treasuries Even With Hawkish Fed

Central banks have ramped up their hawkish rhetoric this month but for bond bulls, that’s a good thing.

Investors are piling into longer-dated notes on bets that policymakers will succeed in taming inflation, an outcome that will deliver strong and stable returns on debt. Benchmark 10-year Treasury yields have fallen 10 basis points this year to 3.77% even after the Federal Reserve jacked up interest rates aggressively and vowed to keep hiking.

Undeterred by a record 12% loss in US bonds last year, investors are wagering that central banks will finally be able to get a handle on inflation as growth slows and supply chain disruptions ease. They risk being caught flat-footed if price gains prove to be more stubborn than expected, forcing authorities to keep borrowing costs higher for longer.

“We are in an ironic situation where the more hawkish central banks are in hiking rates, the better it is for inflation credibility and long-term yield stability, assuming that there are no fiscal upsets along the way like in the UK last year,” said Chang Wei Liang, a strategist at DBS Bank Ltd. “This is true if markets see long-term inflation expectations as being anchored at close to 2%, and if they view long-term growth rates to be no higher than what they are today.”

Bond Forecasts Remain Anchored as Rate Expectations Soar | Bullish outlook underscores consensus for economy to turn sour

Analysts in a Bloomberg survey predict that the 10-year US yield will decline to 3.39% by year-end. Treasuries have lost almost 2% over the past three months, paring this year’s gain to about 1.6%, according to a Bloomberg index.