Constant rise in Treasury yields

The uptrend in US bond yields continued apace last week, particularly at the long end of the curve, with the 10-year yield rising by 32 basis points. Investors were reacting to remarks by some of the Fed’s top brass suggesting that more stringent monetary tightening was in the works than had been expected.

Early in the week FOMC member Lael Brainard, who is slated to become the next Fed Vice Chair at the behest of Joe Biden, made it clear that the Fed’s overriding mission was to curb the intense inflationary pressures visible in the US since mid-2021. Latest year-on-year inflation was 7.9% in February – a level not seen since the early 1980s. In the same month in 2021, the figure was just 1.7%. This inflation-busting attitude unsettled markets because Ms Brainard was previously perceived as a dove (i.e. fairly tolerant of inflation, unlike her hawkish peers).

A few days later James Bullard, President of the Missouri Fed, drove the message home by announcing that he would like to see Fed funds up at 3-3.25% in the second half of the year compared with 0.25-0.50% at the moment.

Bullard is a notorious hawk but the news nonetheless rattled investors. He then commented that several FOMC members would have voted for a half-point hike at the latest meeting in March, instead of the quarter-point increase, had Russia not attacked Ukraine. These remarks further put the wind up investors.

The tensions affecting US yields last week helped the dollar, which appreciated by 1.6% against the euro and 0.9% against the Swiss franc.

US and European equities weathered the sharp rise in long-term yields relatively well, with the S&P 500 posting a weekly decline of only 0.1% while the Stoxx 600 succeeded in gaining 0.6%. Explaining this resilience last week was the lack of alternatives to equities, unchanged expectations of strong earnings growth in 2022 and the consensus view that the Fed is capable of cooling down inflation without hurting economic growth or upsetting Wall Street. That is also why equities have not fallen back too far year to date despite the deterioration in bond markets and the surge in geopolitical exposures.

Fed’s focus firmly on inflation

In late November, the Fed stated that talk of “transitory inflation” was no longer appropriate, adding that it would have to start withdrawing the unprecedented monetary support that the wider economy and financial markets had been receiving since 2020.

The reason why the Fed stuck to this ultra-loose policy for so long was its focus on full employment – one side of its dual mandate.

This decision to foster a broad-based recovery in the labour market, for the benefit of all strata of society, including those least qualified (who generally take time to find work), was made during the economic slump in 2020. The sharp recession triggered by the anti-corona measures severely affected low-skilled workers, many of whom had been employed in services industries and who as a result were hit hard by the lockdown measures.

For some months, with the jobs recovery locked in (as gauged by unemployment down at 3.8%), the Fed has been able to concentrate on the second part of its mandate – price stability – as it seeks to safeguard the purchasing power of ordinary Americans, especially the poorest families, who are most at risk from inflation. In her latest remarks, Ms Brainard pointed out that the poorest households spend 77% of their income on basic necessities (most notably food and energy), the prices of which have increased considerably over the past year, compared with only 31% for the wealthiest households.

Download the Flash boursier (pdf)

This document is provided for your information only. It has been compiledfrom information collected from sources believed to be reliable and up to date, with no warranty as to its accuracy or completeness.By their very nature, markets and financial products are subject to the risk of substantial losses which may be incompatible with your risk tolerance.Any past performance that may be reflected in this documentis not a reliable indicator of future results.Nothing contained in this document should be construed as professional or investment advice. This document is not an offer to you to sell or a solicitation of an offer to buy any securities or any other financial product of any nature, and the Bank assumes no liability whatsoever in respect of this document.The Bank reserves the right, where necessary, to depart from the opinions expressed in this document, particularly in connection with the management of its clients’ mandates and the management of certain collective investments.The Bank is a Swiss bank subject to regulation and supervision by the Swiss Financial Market Supervisory Authority (FINMA).It is not authorised or supervised by any foreign regulator.Consequently, the publication of this document outside Switzerland, and the sale of certain products to investors resident or domiciled outside Switzerland may be subject to restrictions or prohibitions under foreign law.It is your responsibility to seek information regarding your status in this respect and to comply with all applicable laws and regulations.We strongly advise you to seek independentlegal and financial advice from qualified professional advisers before taking any decision based on the contents of this publication.