The US Treasury market posted a record annual loss in 2022, driven by inflationary pressures that prompted the Federal Reserve to raise its overnight benchmark by more than four points.
Output peaked in October or November, then retreated as inflation gauges began to moderate and Fed officials slowed the pace of policy tightening. The yield curve reversed, with rates for the 5-year note surpassing the 30-year security for the first time in March, while the spread between the two- and 10-year yields also rose.
Finally, these fluctuations have reached historic levels, which means investors expect higher short-term yields to hurt the economy. The two-10-year curve’s reversal on Dec. 7 was as high as 85.2 basis points, before ending the year at around 56 basis points. The five-year premium over the 30-year rate at one point reached 46.8 basis points.
For 2023, many US interest rate strategists expect the Treasury to extend its recent rate hike until labor market conditions soften and further suppress inflation, reducing yields and in the second half. will raise the rabbit in the year.
- Bloomberg’s US Treasury index returned -12.5%, its second full-year loss and the biggest in its four-decade history; The worst months of the index were September (-3.45%), March (-3.11%) and April (-3.10%); The 1Q loss of 5.58% was the largest for a single quarter
- 2022 changes for standard products:
- 2Y +369bp
- 5Y +274bp
- 10Y +236bp
- 30Y +206bp
- The yield rose as the likely course of the Fed’s policy rate was constantly reassessed, both before and after the central bank began raising rates.
- In January, swap contracts covering Fed meeting dates rose by four quarter-points over the course of the year.
- The central bank’s first move came in March, when officials raised the benchmark rate from 0.25% to 0.5%, a quarter point above where it had been.
- In April, there were half-point increases for the last four meetings
- By June, when the Fed raised rates for the first time in three quarters since 1994, the market had started to see rates fall from their recent peak.
- In December, when Fed policymakers published new forecasts of an average 5.125% for the funds rate in 2023, market expectations for the next peak below 5% fell from highs around 5.25%. .
- Russia’s invasion of Ukraine in February temporarily halted the sell-off, but it has resumed as crude oil prices hit their highest level in more than a decade, predicting higher gasoline prices; The cost of agricultural products also increased
- By the end of the year, commodity prices generally returned to February levels, with oil and gasoline revenues reaching year-to-date lows in December.
- US inflation accelerated in the first half, with the Consumer Price Index peaking at 9.1% year-on-year in June, and falling to 7.1% in November; Core inflation rose to 6% from 6.6% in September.
- Five-year inflation expectations, as measured by yields on Treasury inflation-protected securities, rose to more than 3.7% in March and retreated to about 2.38% by the end of the year.
- In the second half of the year, Treasury balances surpassed their June levels as yields in the UK and the eurozone began to rise, raising expectations for where central banks in those economies might need to hold policy rates. shows
- In September, tax cuts proposed by a new British government led to a hit in UK output that also hurt sovereign bonds around the world until the plan was withdrawn and another change of leadership done
- Treasuries were also boosted by the Bank of Canada – which posted a larger-than-expected 100 bp increase in July and a smaller-than-expected 50 bp increase in October – and the Bank of Japan- and Bank of Japan, in the second half of the year. were surrounded by surprise movements. which raised the 10-year benchmark rate in December, leading to a sell-off in Japanese government bonds.
- As losses mounted, large day-to-day fluctuations in production became more common, and volatility and liquidity parameters reached critical levels.
- Some of the biggest daily changes in production were:
- February 28, a rally sparked by asylum seekers following sanctions on Russia, with end-of-month buying aid
- March 2, a sell-off after Fed Chair Jerome Powell backed a 50bp rate hike if needed
- June 13, a sell-off that was part of the market’s continued decline since the May CPI data was released on June 10.
- June 15, a rally after Powell downgraded the outlook for a 100bp rate hike
- September 28, a rally led by UK bonds after the Bank of England intervened to stop rising yields.
- October 3, a rally led by UK bonds, helped by the ISM manufacturing gauge
- November 10th was pushed by October inflation data
- The Fed stopped investing all maturing Treasuries on its balance sheet in June in line with plans announced in May.
- The Treasury Department continued to reduce coupon auction sizes throughout the year, until November, when it said they had reached sustainable levels.
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