Treasury ETFs Retreat as Traders Readjust to Fed's Hawkish Stance

Treasury bond exchange traded funds retreated Thursday with yields on long-term Treasuries surging the most in 18 months as traders looked on in anticipation of the Federal Reserve’s first rate hike by the end of 2022.

On Tuesday, the Vanguard Intermediate-Term Treasury ETF (VGIT) fell 0.01%, and the Vanguard Long-Term Treasury ETF (VGLT) decreased 0.11% Yields on benchmark 10-year Treasury notes rose to 1.41%, while yields on 30-year Treasuries were at 1.924%. Bond yields and prices have an inverse relationship.

Yields on 30-year Treasuries jumped as much as 12 basis points Thursday, the most since the start of the coronavirus pandemic back in March 2020.

Meanwhile, the implied yield of the December 2022 Fed fund futures contract increased about five basis points over the past two days to 0.28%, indicating that traders were anticipating a 25-basis-point rate hike, Bloomberg reports. Investors previously priced in the Fed to begin its rate hikes by early 2023.

Traders now raised their rate bets in response to Wednesday’s Fed meeting, which many viewed as more hawkish after Chair Jerome Powell stated that the central bank could begin cutting back its pandemic-era bond purchases in November and completely end the program by mid-2022.

“The turbo-charged taper – a little bit of a surprise, it was coming in a relatively short period that they’re planning for this, but the markets are OK with that at the end of the day,” Paul Donovan, UBS’s global chief economist, told Bloomberg.

Participants are showing confidence that the market could come out of the Fed tapering without any significant upheavals, unlike the so-called taper tantrum that occurred back in 2013, which triggered significant losses across both the fixed-income and equity markets. Many are betting that the ongoing economic and profit recovery could help offset any downside from a cutback in the Fed’s accommodative stance. Meanwhile, the lower-for-longer yield environment could continue to support risk appetite.

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