Although the moves of the Federal Reserve (Fed) on raising interest rates hurt stock investors, bond investors had it much worse due to an inverse relationship between bond prices and rates. However, stocks could still be in more trouble since the bond market is dangerously close to crashing.
A worst-case scenario was dangerously close to playing out in the UK, where the Bank of England had to step in to alleviate the material risk to the UK’s financial stability.
Meanwhile, in the US, the 10-year treasury bond is on pace for its worst year in history, losing 18%, according to Charlie Bilello, CEO of Capital Advisors, who shared the historical returns of bonds on Twitter on October 16.
10-year US treasury yields closed over 4.00% for the first time since 2009 on October 14, which does not bode well for stocks or bonds. In the meantime, US equities suffered their 3rd biggest drawdown in history in 2022.
Stepping away from government debt
The fact that the Fed will be looking to offload $60 billion a month from its balance sheet and that there are fewer buyers of US government debt in combination represents a scary proposition for the markets.
Glen Capelo, managing director at Mischler Financial, expressed his worries about central banks not buying up treasuries at the usual pace.
“We need to find a new marginal buyer of Treasuries as central banks and banks overall are exiting stage left. It’s still not clear yet who that will be, but we know they’re going to be a lot more price sensitive.”
Bulls are hoping for a U-turn from the Fed, as right now, its strategy revolves around showing extreme and unwavering hawkishness, which resulted in treasury yields and mortgages surging.
If the pivot doesn’t come about any time soon, the market risk could increase as investors may be looking to exit volatile and more unpredictable than usual markets.
Due to ongoing concerns about inflation and the state of the economy’s current state of contraction, the bond market has been very volatile recently. indeed, the bond market has been quite turbulent over the previous two weeks due to inflation concerns. Rates should buoy in the next six months as fears continue to grip America over a pending recession.
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