Bond Investors disappointed by Fed’s actions
2023.01.31 03:59
Bond Investors disappointed by Fed’s actions
By Tiffany Smith
Budrigannews.com – Even though stocks have started the year with a hopeful rally, fears of a recession are driving investors into Treasuries and other fixed-income investments ahead of the Federal Reserve’s first meeting in 2023.
Investors poured $4.89 billion into U.S. bond funds last week, marking the third consecutive week of net inflows, and yields on the benchmark U.S. 10-year Treasury note, which move in opposite directions to prices, have decreased by approximately 83 basis points from their peak in October of 4.338 percent. Following the Federal Reserve’s most aggressive monetary policy tightening since the 1980s, Treasuries experienced their worst year ever. This led to the rally.
Demand for Treasuries, which are frequently viewed as a safe haven during times of economic uncertainty, has been primarily driven by concerns that the Fed’s rate increases will send the U.S. economy into a recession.
Markets are also looking for signs that the Fed is pulling back on its hawkish monetary policy in light of signs of falling inflation and softness in the economy, despite the fact that investors generally anticipate the Fed to raise rates by another 25 basis points at the conclusion of its monetary policy meeting on February 1.
Glenmede Investment Management director of fixed income Rob Daly stated, “Things are coming off the boil here.” De-risking is taking place, and investors are moving away from stocks and toward higher-quality markets like fixed income.
That contrasts with the recent stock rally, which has raised hopes of a so-called “soft landing,” in which inflation eases and growth remains resilient, and has reduced concerns about a recession.
In a rebound that has lifted many of the names that were beaten down in the equity rout of last year, the has increased by 4.6% year to date and is up nearly 9%.
However, some equity investors are sticking to their guns and anticipating that the current stock rally will wane in the event of a recession. According to data from Refinitiv Lipper, investors have taken out approximately $1.14 billion from U.S. equity funds in the most recent week, despite the fact that indexes are rising.
Phil Orlando, Federated Hermes (NYSE:) chief equity strategist, in anticipation of a reversal in the current rally in stocks, is sitting in Treasuries, cash, and other defensive investments. “We need to maintain a defensive posture because we have the impression that stocks are (going) lower,” he stated.
Many investors fear that the Fed’s projection that it will raise its key policy rate to between 5% and 5.25 percent and keep it there at least until the end of the year will make a recession almost certain or exacerbate an economic downturn.
At the moment, the rate is between 4.45% and 4.50%. For the time being, many investors are committed to a view that is more dovish, betting that policymakers will blink if growth slows. Futures markets indicate that rates will fall in the second half of the year and reach a peak of around 4.93 percent.
Theoretically, raising expectations of a Fed that is more dovish would reduce expectations for how high rates will rise and strengthen the case for bond yields to fall.
Ellis Phifer, managing director of fixed income research at Raymond James, stated, “My bet is on a recession.” Rates typically fall across the curve when the Fed finishes raising rates, so the Fed is closer to the end than the beginning.
Naturally, there are some investors who are content to believe the central bank and bet that interest rates will continue to rise.
(NYSE:) BlackRock, “Overtighten policy because they’re worried about the persistence of underlying core inflation,” the world’s largest asset manager wrote on Monday, “believes the disconnect will resolve in favor of higher rates.”
The company’s strategists advised agency mortgage-backed securities, high-grade credit, and short-term government bonds.
The National Bureau of Economic Research (NBER) typically calls recessions in hindsight, but few investors believe the U.S. economy is currently experiencing one. However, layoffs in the technology industry, a decrease in manufacturing activity, and lower consumer spending have been cited as indicators of a coming downturn.
According to Bruno Braizinha, director of the U.S. rates strategy at BofA Securities in New York, demand for Treasuries has increased, indicating a “more cautious view for the outlook.” He added, “The core view of BofA is a recession in the second half with job losses.” Therefore, I don’t think it’s unreasonable for the market to reduce prices by the end of 2023.”
