The US Treasury carries the risk of a Fed breach, a flood of corporate issues


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U.S. Treasury bonders are facing a perfect storm that could bring reference yields to their highest level in nearly two years, while investors are worried about the increasingly hawky Federal Reserve https://www.reuters.com/markets/europe/investors-brace-quantitative – tightening-fed-sends-hawkish-message-2022-01-06, rising inflation and flooding supply.

The 10-year reference yields jumped to 1.753% on Thursday, from a low of 1.491% at the end of the year and 1.353% on December 20th. Yields are now slightly below the level of 1.776% reached in March 2021. The highest yield since February 2020.

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Analysts say a definite break above technical resistance of up to about 1.79% would likely signal further gains in the 2% range.

In the second half of 2021, there were several increases in reference yields, ranging from bond prices, which failed around current levels as markets were affected by concerns about COVID-19, economic growth and as investors demanded US debt for relatively higher yield.

Investors are increasingly believing that this path could be different, not least because the Fed Hawk seems ready to pull rates https://www.reuters.com/markets/us/fed-may-need-hike-rates- faster-reduce-balance-sheet-fast-minutes-show-2022-01-05 in its fight against rising inflation.

Yields rose further after minutes of the Fed’s meeting in December on Wednesday showed officials discussed a reduction in the US Federal Reserve’s total assets, as well as an increase in interest rates earlier than expected to fight inflation.

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“This talk of letting go of the balance sheet and predicting a future where there are no more Fed purchases … people will now prepare for that,” said Tom Simons, a money market economist at Jefferies.

Other factors pushing yield yields include corporate debt issuers who have locked interest rates in a hurry to outpace interest rate hikes, and a broad market change in bond prices after demand for safe haven helped keep yields too low from year-end baseline indicators. .

Bond demand is also expected to worsen this year compared to supply, as central banks refuse to buy. Just two months ago, the Fed bought an additional $ 120 billion a month in bonds.

HAWKISH FED

The Fed is under pressure to speed up the abolition of its emergency accommodation due to growing price pressures https://www.reuters.com/business/nov-cpi-heats-up-highest-year-on-year-rate-since-1982-2021- 12-10 proved to be more stubborn than thought. The rapid spread of the Omicron coronavirus variant may also contribute to supply disruptions, potentially increasing inflationary pressures.

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The surprisingly strong national report on ADP employment on Wednesday also suggests that a labor market recovery could justify an increase in rates. The U.S. government will release its long-awaited employment report for December on Friday.

“The conditions for raising Fed rates seem to be largely met as the job market is now quite robust,” said Kim Rupert, executive director of global fixed income analysis at Action Economics, though she noted that the holiday season could have created anomaly data.

Fed fund futures now have a full price in three rate increases by the end of 2022, with the first increase probably already in March.

BALANCE OF SUPPLY AND DEMAND

The rush of companies to borrow in bond markets before the Fed raises rates contributes to the Treasury’s weakness as issuers enter into agreements to close rates for sales.

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“It seems that companies are trying to increase their debts as soon as possible. As rates rise, there will be more and more discussions about issuing debt now instead of waiting for it to be done at a better level, ”said Tom di Galoma, CEO of Seaport Global Holdings in New York.

The global balance of supply and demand for bonds will also deteriorate this year as central banks, including the Fed and the European Central Bank (ECB), continue to reduce bond purchases, which could lead to greater pressure on yields.

JPMorgan analysts, including Nikolaos Panigirtzoglou, said in a report Wednesday that if the Fed starts shrinking its balance sheet after just two increases in September, the market may have to absorb an additional $ 150 billion in net treasury emissions in the last quarter of 2022.

If Congress passes new spending in the form of the Build Back Better Act, net issuance could increase by about $ 200 billion this year, making $ 250 billion in new spending and $ 50 billion in taxes.

JPMorgan predicts a worsening of global supply and demand for bonds of $ 1.1 trillion this year compared to 2021, which could increase yields on the Bloomberg Barclays Global Aggregate Index by 30 basis points.

(Reporting by Karen Brettell and Gertrude Chavez-Dreyfuss; Editing by Ira Iosebashvili and Nick Zieminski)

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