https://www.wsj.com/articles/bond-rout-promises-more-pain-for-investors-11650122040?mod=hp_lead_pos3
The worst bond rout in decades shows few signs of abating, threatening further pain for both investors and borrowers.
Rising Treasury yields are in many ways a reflection of a robust economy. A big reason why many investors expect continued high inflation in the near term is that households are flush with cash and eager to spend their money on travel and leisure activities as they begin to worry less about the Covid-19 pandemic. The labor market is also, by some measures, the tightest in decades, giving workers leverage to demand better wages and confidence that they can always find a different job if they lose their current one.
These forces, though, are precisely why the Fed has been trying to push up bond yields by promising a rapid series of interest-rate increases—an effort whose urgency hasn’t been diminished by a modestly encouraging inflation report last week. Many investors are saying they expect bond prices to continue to fall this year, and some contend it won’t be clear that the central bank’s message is getting through until stock prices suffer more serious declines.
Treasury yields largely reflect expectations for short-term rates over the life of a bond. They in turn set a floor on borrowing costs across the economy. The Fed, now, wants borrowing costs to rise to slow consumer demand and bring down inflation—and it is succeeding at least in the first of goals, with the average 30-year mortgage climbing last week to 5% for the first time since 2011.
One hope of some bond investors is that surging consumer prices, coupled with higher borrowing costs, could slow consumer demand in relatively short order. In that case, the Fed could keep tightening monetary policy, but officials wouldn’t feel the need to raise their rate forecasts further, allowing bond yields to stabilize.
Guessing the final destination of interest rates is extremely difficult, he said, but one sign that the Fed might need to do more than currently expected is that stocks, as a whole, have only experienced modest declines, with the S&P 500 down 7.8% year-to-date.
Caveat Emptor people.
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