Fed chair’s Jackson Hole speech did little to dissuade markets on rates
Federal Reserve Chair Jerome Powell on Friday did little to dissuade markets from the “higher for longer” mantra for rates that has driven up Treasury yields in recent weeks, leaving some investors looking for more cautious bets in case the economy is unable to escape a downturn next year.
For some investors, the view also reinforced worries over the risk that higher yields will eventually weigh on the economy’s robust growth and bring on a potential downturn, though most believe the U.S. is likely to avoid recession in 2023. Financial markets on Friday saw little of the volatility that accompanied last year’s Jackson Hole confab, when stocks sank more than 3.4%.
The surge in bond yields over the last few months - driven by bets that the Fed will need to keep rates around current levels for longer than expected to prevent inflation from reigniting - has rippled out into the economy, pushing 30-year mortgage rates to their highest level in over 20 years while credit spreads, a measure of risk, widened slightly this month.
“The prospect of a soft landing is lower after today,” said Mike Sewell, a portfolio manager at T. Rowe Price, who expects to add to long-term bonds over the fourth quarter as the U.S. economy begins to weaken.Fed funds futures traders were pricing for a total of nearly 100 basis points of rate cuts next year, roughly unchanged from bets prior to Powell’s speech, but the first rate cut was pushed out to June from May.
Hedge funds’ bearish bets on long-term U.S. Treasuries have built up over several weeks, with net short positions in 10-year U.S. Treasuries futures at their highest levels since the beginning of July, according to Commodity Futures Trading Commission data from last week.
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