Bond prices have weakened as a growing number of investors expect higher yields, despite 28 April comments by U.S. Federal Reserve chair Jerome Powell that the Fed has no plans to throttle back its monthly rate of bond purchases.
“It is not time yet,” he said in comments quoted by the Financial Times. “Economic activity and hiring have just recently picked up. It will take some time before we see substantial further progress.”
The Fed has vowed to hold interest rates steady near zero through 2023.
However, reaffirming our forecast, eurodollar futures – a barometer of expectations around interest-rate changes – hint that investors foresee central banks raising rates early in 2023, with at least two additional hikes before April 2024.
Powell’s words sparked a brief rally that quickly faded.
The continuing price slide indicates that the Fed will struggle to keep interest rates low as the world’s economy recovers and prices for goods and services rise, many analysts contend.
With the U.S. economy growing faster than 6 percent, investors are questioning the wisdom of parking their money in bonds with low, fixed yields.
“Pressure will start to build around the [Fed’s] June meeting for tapering talk” to get underway, Invesco portfolio manager Noelle Corum told the FT.
“Tapering” is shorthand for the Fed reducing its monthly bond purchases, which will be clearly signaled by the central bank far in advance of any such action to give markets a long lead time to adjust to the Fed’s shrinking presence, Powell and other Fed officials have said repeatedly.
TREND FORECAST: While the Fed has vowed to hold interest rates near zero through 2023, as per Janet Yellen’s warning today of rising inflation, we forecast that as the Biden Bounce economy booms and inflation spikes higher, interest rates may move higher this year.
