Treasury bonds and related exchange traded funds strengthened Friday on lessening fears that the Federal Reserve policymakers will continue with aggressive interest rate hikes.
On Monday, the Vanguard Extended Duration Treasury ETF (EDV) rose 2.0%.
Bond yields slipped on Friday, following a weak economic reading that helped support a more muted Fed pace of interest rate hikes for the second half of 2022, Bloomberg reported.
“There is no denying that the economy is decelerating,” Gregory Faranello, head of US rates trading and strategy at AmeriVet Securities, told Bloomberg. “If it continues, there is a prospect that the Fed pulls back its pace of tightening once it goes 75 next week.”
The Fed has been raising interest rates to curb a four-decade high inflation reading. The central bank is expected to execute another 75 basis point rate hike this week, after a combined 150 basis points rate rise over its last two policy meetings, marking the steepest rise in Fed rates since the 1980s.
Meanwhile, yields on 30-year bonds dipped back below 3% for the first time since late May. Bond prices and yields have an inverse relationship.
Bond market observers anticipate the Fed to act less hawkish ahead after front-loading its policy with its next 75 basis point hike next week. Specifically, traders are pricing in a half percentage point hike in September, followed by a quarter point hike, potentially capping Fed’s target rate at about 3.5% by the end of 2022 and maybe peaking at 3.75% in 2023 before pausing or even cutting rates, according to a separate Bloomberg report.
“Bloomberg Economics believes a 75-bp hike strikes the correct balance. The risk that inflation will trend upward is high. With COVID cases surging again and the war in Ukraine still raging, it’s likely we haven’t seen the last adverse supply shock. And with inflation expectations already on shaky grounds, the Fed needs to act preemptively before expectations become unmoored,” according to Bloomberg Economics.
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