Den amerikanske centralbank vidste ikke, hvad den talte om, hedder det i en skarp analyse fra Merrill. Den tog grundigt fejl af inflationen. Men til gengæld tog den så affære med de kommende rentestigninger, og derfor er det værste af den seneste nedtur måske overstået – hvor den ti-årige T-bond rente er under 3 pct. Men det forudsætter, at renten ikke nærmer sig 5,5 pct. – et niveau, vi ikke har set i 20 år, og som i givet fald er helt ude af trit med de globale renter. Merrill skriver ikke, hvad konsekvensen i så fald bliver, men analysen mere end indikerer, at resultatet i så fald bliver særdeles negativt.
Transparent Fed, Opaque Risk
The government’s pandemic response created monetary-financed deficits that led to the highest inflation in four decades. The Fed was slow to understand this, initially diagnosing inflation as “transitory.” That myth is dispelled, now in our 13th month above the Fed’s inflation target with CPI at 8.5%.
Fed transparency led to market opacity. The bond market listened; but unfortunately the Fed did not know what it was talking about. In June 2021, the Fed had conditioned the market to expect one rate hike by June 2023. As of today, the market expects the equivalent of another 11 25-basis-point (bps) rate hikes by June 2023 (via 25 or 50 bps hikes at each meeting, after the one already done).
This is the largest pivot in modern-day Fed history. The Fed’s abrupt about-face to get out from behind the curve has created some of the largest Fixed Income drawdowns to date, especially on Treasurys and short-dated securities. In reality, this is not all bad news.
First, the ability to reinvest cash flows at higher yields is a welcome outcome for savers penalized by years of financial repression.
Second, market value declines on high-quality bonds are not permanent impairments of capital for investors with the ability and willingness to hold to term. Total returns on high-quality bond portfolios will trend back to their acquisition yield, as bonds are “pulled to par” closer to maturity. Market value losses never affect principal at maturity—only present values of
that principal.
Finally, while the future is far from certain, it is possible that a good portion of market value losses are behind us. The market expects the terminal fed funds rate to be in the low 3% range, longer-dated yield curves are already flattening, and 10-year
Treasurys have moved from 0.5% to close to 3% already. Unless the 10-year rises to 5.5% quickly—a level not seen in 20 years, completely out of context of low yields globally— then the vast majority of market value losses may have already occurred.
