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‘Bond market acts as a mirror to economic realities’

Federal Reserve Chair Jerome Powell address the media.
  • Bond market's selling pressure illustrates its role in reflecting economic realities, says Nigel Green
  • A 27 basis points surge in 10-year yields marks notable market movement since June 2022, he adds.

LONDON — The selling pressure in bonds underscores the bond market’s role in “reflecting reality,” according to Nigel Green of the deVere Group.

Green’s analysis follows a significant surge in the 10-year yield by approximately 27 basis points from Friday to Monday, marking the most notable two-day rise since June 2022.

This movement in the financial markets was triggered by Federal Reserve Chair Jerome Powell’s resistance to the idea of an imminent interest rate cut, surprising investors and causing a sharp adjustment in bond prices.

Short-dated Treasuries, which are sensitive to interest rate forecasts, saw substantial losses, with two-year yields climbing to a one-month high of 4.46 percent. Despite earlier expectations of a rate cut in March, Powell’s cautious approach highlights the Fed’s reliance on “data-driven decision-making.”

In an interview with CBS’s 60 Minutes, Powell mentioned the need for more economic data to ensure inflation is moving towards their 2 percent target. This shift in stance has led investors to reassess their expectations and revise their rate cut predictions.

Nigel Green noted, “We have been among the few voices publicly stating that the market’s expectations were out of alignment with the likely imminent actions on rates. The bond market’s reaction to Powell’s interview and economic data reflects the market now aligning with economic realities.”

Green further explained that initial market expectations for a March rate cut were based on inflation’s downward trend. However, the robustness of the U.S. labor market continues to challenge these expectations, with no immediate signs of a Federal Reserve pivot.

“Powell’s insistence on awaiting further economic data emphasizes the Federal Reserve’s dedication to avoiding hasty policy changes that might lead to unintended consequences,” Green added. The recent increase in annual consumer price growth to 3.4 percent in December complicates the Fed’s decision-making process.

“Powell’s focus on verifying inflation’s trajectory is in line with the central bank’s dual mandate of ensuring price stability and maximum sustainable employment. The bond market’s reaction, with rising yields, signifies a shift in expectations about the inflationary landscape and the Fed’s anticipated response.”

The bond market’s adjustments in reaction to the Fed Chair’s comments highlight the critical importance of keeping up with evolving economic data and central bank communications and the value of consulting with an advisor to optimally align investment portfolios.

Green concludes, “The bond market acts as a mirror, reflecting changing perceptions and economic realities.”