Bond Investors Caught Between Inflation Worries And Recession Fears
Investing.com | May 17, 2022 18:20
Up, down, up, down—US Treasury yields are bouncing around as investors try to balance worries about inflation with concern about a global economic slowdown, or even a recession.
Good news, bad news—data is mixed and the economy has no clear direction. The benchmark 10-year Treasury note yield fell on Monday to just below 2.9% after climbing near 3.2% last week.
Technical analysts put a lot of stock (no pun intended) in the 10-year’s inability to stay above that 3% level, confidently saying if it hasn’t broken through by now, it won’t. We’ll see, but the crystal ball is decidedly murky.
What we have seen in the immediate past is that investors are quick to dump Treasuries if inflation runs hot. Last week’s reading on the April consumer price index came in lower on the year at 8.3% than March’s 8.5%, but that was higher than the 8.1% forecast and hardly evidence that inflation has peaked.
Opinions vary, but there is a growing consensus that inflation will remain quite high.
While Treasury yields go up and down, the dollar goes from strength to strength and is now nearing parity with the euro, which bought $1.20 just weeks ago.
This is partly due to the more aggressive Fed stance on interest rates, which is coming late but is well ahead of any plans at the European Central Bank, where policymakers are still debating whether to get out of negative territory.
The twist is that a stronger currency reduces inflation because it makes imports cheaper, while a weaker currency exacerbates inflation by making them more expensive.
In this case, higher interest rates are making the dollar attractive and drawing inflows, while lower rates make the euro less desirable, encouraging hot money to flow to the US.
h2 European Central Bankers' Dilemma/h2The head of the French central bank, François Villeroy de Galhau, on Monday said he is worried about the weakness of the euro driving higher inflation.
Get The App
Villeroy de Galhau has been middle of the road on interest rates, but his remarks drove the yield on Germany’s 10-year bond briefly back above 1% before it fell back in line with Treasury yields. The German bond yield peaked at just over 1.17% last week, but retreated to 0.94% in late Monday trading.
The dilemma for European central bankers is how vulnerable the economy is because of its dependence on Russian oil and gas.
Washington officials warned their EU counterparts for years about the risk of this dependence, but Germany, in particular, pooh-poohed their concerns and pushed ahead with a new pipeline to deliver Russian gas directly to Germany under the Baltic Sea. (The Nord Stream 2 pipeline has now been mothballed.)
There is very little schadenfreude in Washington that those warnings were spot on, because skyrocketing energy prices in Europe not only pull US prices up with them, they jeopardize the continent’s economy.
Russian President Vladimir Putin still allows gas to flow, but he is trying to force the West to pay for it in rubles in retaliation for sanctions against Russia for invading Ukraine, including a freeze on Moscow’s foreign reserves.
It is becoming clear that a global economy is a great thing when everybody plays by the rules, but it can lead to huge disruptions when a bad actor acts badly.
On top of everything else, China, the world’s second largest economy, is pursuing a zero-COVID policy with draconian lockdowns and quarantines that have led to a huge drop in economic activity.
Little wonder that cautious investors prefer the safety of the dollar and a Treasury bond in such an unsettled environment.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.