(Bloomberg) — Interest-rate markets remain resolute in anticipating that the Federal Reserve will plow on with increasing borrowing costs even as riskier assets tumble globally and geopolitical discord ramps up.
Precipitous declines in U.S. stocks and other risk assets have historically given pause to policy makers, giving rise to the notion of a so-called Fed put for American equities. But this time around, bets on benchmark hikes this year are intact even amid the current tumble, which has seen the technology-heavy Nasdaq index slump 12% this month.
Swap markets show a quarter-point Fed rate increase is priced in for March and close to a full percentage point is in the market for the whole of 2022.
The Treasury yield curve, which has been flattening amid investor bets that the Fed will act against inflation and speculation by some that it could dent growth too, reached new lows Monday. The gap between 2- and 10-year securities touched as little as 70 basis points, a level last seen in late 2020.
The yield on the two-year Treasury, a tenor that’s closely linked to central bank expectations, remained near its level from the end of last week even as fears around Russia and other issues weigh on equity futures. The government is slated to auction two-year notes later in the day.
One key difference now is that the Fed, focused as it is on heightened inflation, may not have scope to promise support even if officials wanted to — for now at least. And indeed it’s the very concern about just how much the Fed might need to tighten that is adding fuel to sell-offs in shares. Its next policy decision is due to be delivered this Wednesday.
Of course, just how sticky inflation proves to be, the exact paths that the Fed might choose to take in tightening policy and how the markets will respond to that are very much up in the air.
‘Very Reactive’
In addition to attempting to predict rate increases, and how successful they might be in anchoring inflation, investors are also busy factoring in when and how the central bank might shrink its balance sheet.
“After an initial attempt at trying to regain credibility on inflation, they will still be very reactive thereafter to the state of their financial and economic surroundings,” Peter Boockvar, chief investment officer at Bleakley Advisory Group, said in a note.
All that means is that it’s perhaps too early to write the obituary of the Fed put, even if it appears to be missing in action at the moment.
(Updates with comment, adds chart and details throughout.)
More stories like this are available on bloomberg.com
©2022 Bloomberg L.P.
