Bond investors are getting ready for a recession because the Fed is likely to slow down its tightening.
NEW YORK (Reuters) – The U.S.The U.S. Before the first meeting of the Federal Reserve in 2023, investors are buying Treasuries and other fixed-income investments because they are afraid of a recession. This is happening even though stocks are starting the year on a hopeful note. The yields on the benchmark 10-year U.S. Treasury note, which move in the opposite direction of prices, have gone down by about 83 basis points since their high of 4.338% in October. Last week, investors put $4.89 billion into U.S. bond funds, making it the third week in a row that they put money in. After the Fed’s most aggressive tightening of monetary policy since the 1980s, Treasury bonds had their worst year ever. This is why they are now going up. Fears that the Fed’s rate hikes will send the U.S. economy into a recession are a big reason why people want to buy Treasuries, which are often seen as a safe place to be when the economy isn’t doing well. Investors expect the Fed to raise rates by another 25 basis points at the end of its monetary policy meeting on February 1. However, the markets are also looking for signs that the central bank is pulling back on its “hawkish” monetary policy because inflation is falling and the economy is weakening.
Rob Daly, director of fixed income at Glenmede Investment Management, said, “Things are cooling down here.” “There is a de-risking going on, and money is moving out of stocks and into safer parts of the market, like fixed income.” This move is different from the recent rise in stock prices, where worries about a recession are less obvious and hopes of a “soft landing,” where inflation goes down and growth stays strong, have grown.
The S&P 500 is up 4.6% so far this year, and the Nasdaq Composite is up almost 9%. This is a rebound that has helped many companies that were hurt by last year’s stock market crash.
Still, some stock investors are playing it safe because they think that if there is a recession, the current rally in stocks will end. Even though indexes are going up, investors have been pulling $1.14 billion out of U.S. equity funds for ten weeks in a row, according to data from Refinitiv Lipper. Phil Orlando, who is the chief equity strategist at Federated Hermes (NYSE: FHI), is holding onto Treasuries, cash, and other “defensive” investments in case the current rally in stocks turns around. “We think stocks are going down, so we need to stay on the defensive,” he said.
CAUTIOUS STANCE
The Fed has said that it plans to raise its key policy rate to between 5% and 5.25% and keep it there at least until the end of the year. Many investors worry that this will make a recession more likely or worsen one that is already happening. The rate is between 4.25 and 4.50% right now. For now, many investors are stuck on a more “dovish” view, betting that policymakers will back down if growth starts to slow. Futures markets show that most people think rates will peak at about 4.93 percent and go down in the second half of the year.
If people are more sure that the Fed will be more dovish, this could limit how high rates will go and make it more likely that bond yields will go down.
Ellis Phifer, managing director of fixed income research at Raymond James, said, “I’m betting on a recession.” “The Fed is closer to the end than the beginning, and when the Fed is done raising rates, rates tend to go down across the curve.”
Some investors are happy to believe the central bank and bet that rates will stay high for a long time.
The world’s biggest asset manager, BlackRock (NYSE:BLK), wrote on Monday that it thinks the disconnect will be resolved in favour of higher rates as global central banks “overtighten policy because they’re worried about the persistence of underlying core inflation.”
The company’s strategists suggested buying short-term government bonds, high-quality credit, and agency mortgage-backed securities.
The National Bureau of Economic Research (NBER) usually finds out about recessions after the fact, and few investors think the U.S. economy is in one right now. People have pointed to weaker consumer spending, a drop in manufacturing activity, and layoffs in the technology industry as signs that a downturn is coming. Bruno Braizinha, who is in charge of U.S. rates strategy at BofA Securities in New York, said that demand for Treasuries has gone up, which shows “a more cautious view of the future.” He also said that BofA’s main prediction for the second half is a recession with job losses. “So I don’t think it’s crazy that prices will go down in the market in late 2023.”
