By Tom Burnett CFA
The current pictures displayed in the charts of interest rates over the past six months are strikingly similar. The rate increases that began in the fourth quarter of 2021 have continued their trends in 2022. For example, the yield on the Ten-Year Treasury bond closed 2021 at 1.51%. It is now trading at a yield of 2.55%, the highest level since 2019. Similarly, the yield on the 30-year Treasury bond has risen from 1.91% at year end to 2.58% today. Yields on the shorter term issues have also risen sharply and the Five-Year Note now yields 2.69%, above the yields offered by the longer term issues. The yield curve is inverting as the short-term issues begin to yield more than the longer term issues. Many observers believe that inverted yield curves suggest an upcoming recession as the markets reflect the more stringent Federal Reserve policies. The Fed raised its short-term base rate in Mid-March for the first time in three years and its announcement included the clear statement that more rate increases are coming. In addition, the Fed confirmed that it will begin to shrink its $8 trillion balance sheet by letting its holdings of Treasuries and mortgage-backed securities mature without reinvesting the proceeds. The market is clearly heeding the Fed’s warning statements and adjusting to higher yields across the Treasury curve.
Absent any unusual events, the next Federal Reserve meeting decisions will not be made public until May 4, so investors must navigate the fixed income markets by intuition and guesswork until the decisions are announced.
Tom Burnett CFA is Director of Research