New Risks Shadow Bond Market as Fed’s Rate-Hike Cycle Nears End

Bets on a bond-market rally aren’t in the clear just yet.

Federal Reserve Chair Jerome Powell on Wednesday appeared to give traders the positive signal they’ve been waiting for — that the central bank may finally be wrapping up its steepest interest-rate hikes since the early 1980s. Then the next day, European Central Bank President Christine Lagarde said she had an “open mind” on whether to tighten policy further, underscoring the shifting sentiment underway at the world’s central banks.

But other forces are tamping down the optimism.

Wall Street securities dealers expect a glut of Treasury sales to start coming soon as the government steps up its borrowing. The Fed could keep hiking rates — or hold them higher for longer — if inflation proves stickier than expected. And the Bank of Japan has taken a step back from its ultra-loose monetary policy by allowing bond yields to push higher, giving Japanese buyers more incentive to invest at home and pull money back from the US.

The risks were on display Thursday when yields surged after the release of stronger-than-expected data on the US economy and word of the BOJ’s impending move leaked out. That more than erased any dip seen after the Fed’s meeting, pushing 10-year Treasury yields back toward the year’s peaks.

“Jerome Powell, he was a little late to start the hiking cycle and he may stay stubbornly high,” Ken Shinoda, a portfolio manager at DoubleLine Capital, said on Bloomberg television. “The market is expecting cuts as soon as next year and he may stay higher for longer.”

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