Wall Street is bearish on Treasuries in 2022

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The time of dreams

Wall Street is bearish on Treasuries in 2022. The Federal Reserve recently adopted a more hawkish policy, and analysts predict the central bank could raise rates as early as March. This does not bode well for prices, which move inversely to yields, but global demand for higher yielding Treasuries can limit or even prevent losses.

If treasury market investors lose money in the coming year, it would be a record-breaking event. That’s because Treasuries haven’t recorded two consecutive calendar years of losses for at least 43 years, according to ICE index data dating back to 1978.

The treasury market, as measured by an index that tracks treasury bills with maturities of one year or more, will almost certainly lose money in 2021, the first annual loss since 2013. As of December 30, the index was on the verge of losing 1.8% for the year. The poor performance was due to rising yields in response to surging inflation and a rebound in US economic growth after the pandemic slowdown, as well as the Fed’s decision to begin rolling out its easing program. the most ambitious in modern history.


IShares U.S. Treasury Bond ETF

(ticker: GOVT) lost 2.3% for the year through December 29, and the longer-dated iShares 20+ Year Treasury Bond (TLT) ETF lost 5.6%.

At its December meeting, the Fed accelerated its plans to tighten policy. He has announced that he will reduce his bond purchases to twice as much per month as originally planned, which will put him on track to stop buying bonds altogether from March. More importantly, Fed officials predicted three federal funds rate hikes in 2022, up from September’s projection of a rate hike.

Stricter Fed policy means higher yields on Treasuries, as a rule. And Wall Street predicts the 10-year Treasury yield will drop to 2% by the end of 2022, according to Bloomberg data. The 10-year traded Thursday with a return of 1.526%.

If two consecutive years of losses occur, it could indicate that Treasury yields have hit the decades-long lows investors had expected since the 2008-09 financial crisis. Cumberland Advisors’ head of fixed income, John Mousseau, said in a recent memo that “there is a larger question about the long-term decline” in US interest rates that has continued since 1981. ” For the first time in my career at Cumberland, we now feel that a… trough was hit in August 2020, ”he wrote.

The yield on the 10-year note hit a low of 0.52% that month.

However, many investors and market strategists have mistakenly made this call over the past decade. And other trends could still prevent a drastic shift in treasury markets next year.

First, the supply in the bond market will be lower in 2022, as the United States plans to borrow less in the coming months. The Treasury Department said in November that it plans to reduce the size of its bond sales. ING analysts believe that a drop in supply will offset the slowdown in Fed bond purchases.

Second, some economists expect inflation to slow down next year, especially if the Omicron variant of Covid-19 deals another blow to economic growth. Barclays strategists predict that the Fed will suspend rate hikes at the end of 2022 and early 2023, as they expect “disinflationary pressures to prove more pronounced” than officials anticipate. Even if inflation does not slow, investors could dampen long-term returns based on the belief that the Fed will be effective in controlling consumer prices in the future.

There is “considerable uncertainty” around this issue, as Goldman Sachs noted in a mid-November article on its 2022 rate outlook. Position. Bond prices imply that investors expect consumer prices to rise at an annual rate of 2.9% over the next five years, and at a rate of 2.3% over the five years. following, against 2.7% and 2.1%, respectively, at the time of the Fed meeting in mid-December.

Regardless of the risk of inflation, demand for Treasuries could remain strong among global institutions that have good reasons to buy next year. Corporate pensions, for example, might want to buy U.S. bonds to lock in their improved funding ratios after the stock market has risen nearly 30% so far this year.

Foreign buyers could also look to U.S. markets for their income, as Fed Chairman Jerome Powell observed at the central bank press conference in December.

“You just have to look at global sovereign yields around the world,” said Powell. “You can get a much higher yield on US Treasuries than [German] Bunds and you can cover that – put the currency back in yen [or] in euros — and always in advance. So, in a way, it is not surprising that there is a lot of demand for American rulers in a world where they make so much more than Bunds or [Japanese government bonds]. “

None of this means that Treasuries are a particularly good bet for yields in 2022. Even if Wall Street is right and the 10-year is climbing 2%, that would be lower than the median inflation expectations of those responsible for inflation. the Fed for 2022, which was 2.2% in December. Inflation is currently close to 7%, based on the annual change in the US consumer price index in November.

It is also not uncommon for investors to lose money in treasury bills on an inflation-adjusted basis. This has happened over seven of the past 20 years, as measured by comparing the average of annual increases in the Consumer Price Index to annual Treasury market returns.

In short, investors shouldn’t expect much from their Treasury holdings, but neither should they. Based on the all-time high of 40 years, another year of losses would be unusual, and safe government bonds can provide good protection against an unexpected economic deceleration, possibly because of the Omicron Covid-19 variant. T-bills can also protect against a Fed policy error that causes an economic slowdown, meaning that if aggressive enough, the Fed’s rate hikes could be bullish for long-term T-bills. long-term.

Write to Alexandra Scaggs at [email protected]

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