Bond market volatility likely to remain high: Strategist

The Bond Market: Strong Data Sends 10-Year Yield Towards 16-Year High

The bond market is experiencing strong data that is pushing the 10-year yield towards a 16-year high. Currently, the 10-year yield is at 4.82%, causing investors to be concerned about potential rate hikes, the mortgage market, and the crisis in the Middle East. These factors are contributing to the volatility and swings in the bond market. To gain more insight into this market, we spoke with Kathy Jones, Chief Fixed Income Strategist at Charles Schwab.

Marching Towards 5%: Will the 10-Year Yield Continue to Rise?

With the 10-year yield currently at 4.82%, the question arises whether it will continue to march towards 5%. According to Kathy Jones, it certainly looks like it at this stage. The retail sales numbers suggest that upcoming GDP figures will be strong, contributing to the potential rise in the 10-year yield. Historically, the peak rate of the 10-year yield has aligned with the peak rate of the Fed funds, indicating that there is still some upside risk. However, Jones believes that these yields are attractive for investors seeking income, both in nominal and real terms.

Managing Volatility: Strategies for Investing in the Bond Market

The bond market’s volatility has been elevated and is expected to continue due to uncertainty about policy direction, dysfunction in Washington, global issues, and liquidity concerns. In this volatile environment, Jones suggests adopting a barbell strategy or a laddered strategy. These strategies involve spreading out the maturities of bonds and focusing on high-quality bonds. By doing so, investors can lock in an income stream while avoiding the stress of trying to time the market’s ups and downs on a daily basis.

The Fed’s Trajectory: How Rising Rates Impact the Bond Market

The bond market’s movement has been influenced by the Federal Reserve’s tightening policies. While the Fed would like the bond market to be in its current state, the rapid increase in rates has raised questions about the Fed’s trajectory. However, Jones believes that this cycle has been unusual due to the pandemic, supply-side shocks, fiscal stimulus, and geopolitical events. The Fed believes it has done enough to slow the economy, and regional Fed presidents are reporting signs of weakness and concerns in various sectors. The Fed may pause and wait for inflation numbers to trend lower before continuing with tightening measures.

Timeline for Reaching 2% Inflation Target

Reaching the 2% inflation target is expected to take another year or so, according to Jones. The core personal consumption expenditures (PCE), which is the Fed’s benchmark for inflation, is currently at 2.2% on a three-month rolling basis. Once rents start to decrease, inflation pressure should ease, and supply-demand dynamics should improve. The Fed’s projections may push the timeline further, but Jones anticipates that the core PCE will reach the target relatively quickly.

Frequently Asked Questions

Q: What is the current 10-year yield?

A: The current 10-year yield is at 4.82%.

Q: What factors are contributing to the volatility in the bond market?

A: Investors are concerned about potential rate hikes, the mortgage market, and the crisis in the Middle East.

Q: What strategies can investors use to manage volatility in the bond market?

A: Barbell and laddered strategies, which involve spreading out bond maturities and focusing on high-quality bonds, can help manage volatility.

Q: How has the rapid increase in rates impacted the Fed’s trajectory?

A: The Fed may pause and wait for inflation numbers to trend lower before continuing with tightening measures.

Q: When is the timeline for reaching the 2% inflation target?

A: It is expected to take another year or so, but the core PCE may reach the target relatively quickly once rents start to decrease and inflation pressure eases.