Bond Market Losses Just Beginning as Fed Sets Path to 4% Yields

It’s too soon to call an end to America’s worst bond-market collapse in at least half a century.

Treasuries resumed losses on Thursday with 10-year yields surging as much as 21 basis points. That comes a day after Federal Reserve Chair Jerome Powell sought to soften the blow of the largest rate hike since 1994 by saying he didn’t expect moves of that size to become the norm.

Investors also dumped European bonds after a surprise Swiss rate hike, putting Germany’s five-year yield on track for its biggest jump since 2011. Meanwhile, UK debt extended declines after the Bank of England raised rates as expected and hinted at bigger moves ahead.

Some signs suggest the market is yet to face its biggest challenge. Powell said it’s too soon to declare victory over inflation that’s surged to a four-decade high -- or even see much evidence of an economic slowdown that would contain it. And policy makers boosted expectations for where the Fed’s benchmark rate will end next year to a median of 3.8% from 2.8% previously. Five predicted it would exceed 4%.

Such a path would almost certainly increase what are already Treasuries’ worst losses since at least the early 1970s, and spur another leg higher in rates. Two- and 10-year Treasury yields -- now around 3.3% and 3.4%, respectively -- have tended to peak in line with the Fed’s benchmark, making investors eye 4% as the next milestone to test.