The constant rises in interest rates by the Federal Reserve and the promise that they will continue until inflation is reduced are not a good sign for US bonds, which do not seem to recover the falls, according to Liz Capo McCormick and Michael Mackenzie.

Friday’s US jobs report illustrated the economy’s momentum in the face of the Federal Reserve’s ever-increasing effort to cool it, with companies rapidly adding jobs, raising wages and more Americans entering the workforce. While Treasury yields fell as figures showed a slight easing in wage pressures and a rebound in the unemployment rate, the bigger picture reinforced speculation that the Fed is ready to keep raising interest rates — and keep them there. , until the rise in inflation recedes.

Swap investors are pricing in a slightly higher chance that the central bank will continue to raise its benchmark rate by three-quarters of a percentage point on September 21 and tighten policy until it hits around 3.8%. That suggests more downside potential for bond prices because the 10-year Treasury yield has peaked at or above the Fed’s top rate during previous cycles of monetary policy tightening. That return is around 3.19% now.

“Inflation and the Fed’s hawkishness have bitten into the markets,” said Kerrie Debbs, certified financial planner at Main Street Financial Solutions. “And inflation is not going to go away in a couple of months. This reality bites.”

The Treasury market has lost more than 10% in 2022, putting it on track for its deepest annual loss and the first consecutive annual declines since at least the early 1970s, according to a Bloomberg index. A rally that began in mid-June, fueled by speculation that a recession would result in rate cuts next year, has been largely erased as Fed Chairman Jerome Powell emphasized that he is squarely focused on reducing the inflation. Two-year Treasury yields on Thursday hit 3.55%, the highest since 2007.

At the same time, short-term real yields, or those adjusted for expected inflation, have risen, signaling a significant tightening of financial conditions.

Rick Rieder, chief investment officer for global fixed income at BlackRock, is among those who think long-term returns may rise further. He said in an interview on Bloomberg TV on Friday that he expects a 75 basis point hike in the Fed’s benchmark rate this month, which would be the third straight move of that size.

“Friday’s jobs report showing a slowdown in payroll growth allowed the markets to breathe a sigh of relief,” according to Rieder. He noted that his company has been buying some short-term fixed income securities to take advantage of the big increase in yields, but believes longer-maturity bonds have more room to rise.

“I can see rates going up in the long run,” Rieder said. “I think we are in a range. I think we are at the upper end of the range. But I think it’s pretty hard to say we’ve seen the highs currently.”

The jobs report was the last major look at the job market before this month’s meeting of the Federal Open Market Committee.

The upcoming holiday-shortened week has a few economic reports due, including purchasing manager surveys, a look at regional conditions from the Fed’s Beige Book, and weekly figures on jobless benefits. US markets will be closed on Monday for the Labor Day holiday, and the most important indicator ahead of the Fed meeting will be the release of the consumer price index on September 13.

But the market will take a close look at comments from a number of Fed officials who will speak publicly over the next week, including Cleveland Fed President Loretta Mester, who said Wednesday that policymakers should boost the rate. fed funds to more than 4% early next year and indicated he expects no rate cuts in 2023.

Greg Wilensky, head of US fixed income at Janus Henderson, said he, too, is focused on the upcoming release of Atlanta Fed wage data ahead of the next policy-setting meeting. On Friday, the Labor Department reported that average hourly earnings rose 5.2% in August from a year earlier. That was slightly less than the 5.3% expected by economists, but still shows upward pressure on wages from the tight labor market.

“I’m in the 4% to 4.25% terminal rate camp,” Wilensky added. “People are realizing that the Fed is not going to stop on weaker economic data unless inflation weakens dramatically.”

The specter of aggressive Fed tightening has also weighed on stocks, leaving the S&P 500 Index down more than 17% this year. While US stocks rallied from June lows through mid-August, they have since given back much of those gains as bets on an impending recession and 2023 rate cuts are undone.

“You have to stay humble about your ability to forecast data and how rates will react,” said Wilensky, whose core bond funds remain underweight Treasuries. “The worst is over as the market is doing a more reasonable job of pricing where rates should be. But the big question is what is happening with inflation?

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