Analysis: No relief for bruised markets as Fed signals higher rates longer

By Davide Barbuscia and David Randall

NEW YORK (Reuters) – The Fed’s standstill in fighting inflation leaves little hope that this year’s turbulent markets will end soon, as policymakers signal rates will rise faster and higher than many investors expect. they expected.

The Fed raised rates by an expected 75 basis points and signaled that its policy rate would rise 4.4% by the end of the year and peak at 4.6% by the end of 2023, a steeper and longer trajectory than expected. that the markets had discounted.

Investors said the aggressive path suggests increased volatility in stocks and bonds in a year that has already seen bear markets in both asset classes, as well as risks that tighter monetary policy will plunge the US economy into recession.

“Reality is setting in in the markets on the Fed’s messaging and the continuation of this program to raise rates to push rates into tightening territory,” said Brian Kennedy, portfolio manager at Loomis Sayles. “We don’t think we’ve seen the spike in yields yet as the Fed will continue to move here and the economy continues to hold.”

Kennedy’s funds continue to focus on short-dated Treasuries and are holding “elevated” levels of cash as he expects both short-dated and long-dated bond yields to rise 50-100 basis points before peaking. .

Stocks tumbled after the Fed meeting, with the S&P 500 falling 1.7%. Bond yields, which move inversely to prices, soared higher with the two-year yield topping 4% to its highest level since 2007 and the 10-year yield reaching 3,640%, the highest since February 2011. That left the yield curve even more inverted. a sign of impending recession.

The S&P 500 is down 20% this year, while US Treasuries have had their worst year ever. Those drops have come as the Fed has already tightened rates by 300 basis points this year.

“Riskier assets are likely to continue to struggle as investors are going to hold back and be a little more defensive,” said Eric Sterner, chief investment officer at Apollon Wealth Management.

Rising US government bond yields are likely to continue to dampen the appeal of stocks, Sterner said.

“Some investors may look at the equity markets and say the risk is not worth it, and they may shift more of their investments to the fixed income side,” he said. “We may not see such strong returns in equity markets going forward now that interest rates have normalized somewhat.”


In fact, the average forward price-earnings multiple on the S&P 500 was around 14 in 2007, the last time the fed funds rate was at 4.6%. That compares with a forward P/E of just over 17 today, suggesting the stock may have to fall further as rates rise.

“Powell is drawing a line in the sand and remains very committed to fighting inflation and not as concerned about the spillover effects on the economy right now,” said Anders Persson, chief investment officer of global fixed income at Nuveen. . “We have more volatility ahead and the market will have to readjust to that reality.”


Investors have hoarded assets like cash this year as they seek shelter from market volatility while also seeing an opportunity to buy bonds after the market crash.

Many believe the high yields are likely to make those assets attractive to income-seeking investors in the coming months. The shape of the Treasury yield curve, where short-term rates are above long-term rates, also supports caution. Known as an inverted yield curve, the phenomenon has preceded past recessions.

“We’re trying to essentially figure out where the curve is headed,” said Charles Curry, managing director, senior portfolio manager of US fixed income at Xponance, who said his fund has been thinking “very conservatively.” and owns more Treasury bonds than in the past.

Peter Baden, CIO of Genoa Asset Management and Portfolio Manager of the US Benchmark Series, a collection of US Treasury ETF products, said higher yields at the short end of the Treasury yield curve were attractive. At the same time, rising recession risks also increased the appeal of longer-dated bonds.

He compared Powell’s position on inflation to that of former Fed Chairman Paul Volcker, who tamed higher consumer prices in the early 1980s by drastically tightening monetary policy.

“(Powell) says we’ll do whatever it takes. They need to rein in demand and bring it back in line with supply. This is their Paul Volcker moment,” he said.

(Reporting by Davide Barbuscia and David Randall; Additional reporting by Megan Davies and Chuck Mikolajczak; Writing by Ira Iosebashvili; Editing by Megan Davies and Sam Holmes)

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