The US Treasury market is suffering from its worst month since Trump’s election

The US Treasury market is having its worst month since Donald Trump’s election as President in 2016, as high inflation pushes the Federal Reserve to aggressively withdraw monetary stimulus to the economy.

Falling bond prices lifted the benchmark 10-year yield by 0.44 percentage points to 2.27% in March, the highest since May 2019. A rise in yields of this magnitude was last seen in November 2016.

Then, US Treasury yields rose on expectations of a pick-up in US economic growth. Now the trigger is continued strong inflation readings, fueled last month by Russia’s invasion of Ukraine and its potential to contain Ukraine supply of oil and other important raw materials.

The Fed hiked prices for goods and services last week to implement the first hike in interest rates since 2018, and traders are now betting the central bank will hike rates to over 2 percent by December, from near zero earlier this year.

“There is a lot of uneasiness in the bond market about how far the Fed is going and how bad the inflation trend is. Can they get their hands on it?” said Alan McKnight, Regions Bank’s chief investment officer.

Breakeven inflation rates — market measures of inflation expectations derived from US Treasury yields — have risen since last week’s Fed meeting.

That doesn’t necessarily mean investors are doubting the central bank’s determination to tighten monetary policy. But it does suggest that traders believe some of the forces pushing up inflation this month are beyond the Fed’s control, notably the surge in commodity prices that has been attributed to the invasion of Ukraine.

“If anything, last week was an event that boosted the Fed’s credibility because the Fed came out and made it abundantly clear that it will react to inflation and be more aggressive than in previous cycles,” said Ian Lyngen, head of U.S. Interest rate strategy at BMO Capital Markets.

“Now we know what the Fed’s reaction function is, we’ve priced it in, and now we’re going back to trading what drove the market before, which is energy prices,” Lyngen said.

The two-year Treasury yield, which moves closely with interest rate expectations, rose dramatically this month. Yields on the two-year bond rose 0.64 percentage points in March, the largest monthly gain since April 2008.

The jump reflects the Fed’s hawkish turn, which at its policy meeting this month raised interest rates by 0.25 percentage point for the first time since 2018, signaling officials expect to hike rates at each subsequent meeting this year.

Higher yields have been skewed towards shorter-dated debt, flattening the shape of the yield curve, most commonly measured as the spread between two- and ten-year yields. An inverted yield curve has historically been an accurate indicator of a recession, and a flattening curve usually indicates a slowdown in the economy. The yield curve is currently at its flattest since March 2020.

Some investors warned Monday’s moves looked more dramatic as investors who might otherwise be short Treasury market positions covered those positions on Friday and resumed on Monday.

This could be due to fears that weekend events in Ukraine have the potential to drive a flood of money into government bonds, which typically serve as a safe haven during times of geopolitical tension. The US Treasury market is suffering from its worst month since Trump’s election

Adam Bradshaw

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