(Bloomberg) — A consensus is building in the world’s largest bond market as the Federal Reserve moves to pull back its pandemic-era stimulus: There’s a rough ride ahead.

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Fed Chair Jerome Powell on Wednesday said policymakers will take a “humble” and “nimble” approach toward raising interest rates to tame the fastest inflation in four decades, signaling a potential willingness to rip up the old policy-tightening playbook that many traders had come to expect.

That’s left Treasury-bond investors bracing for a period of volatile price swings, with analysts poised to sift through each new bit of data for clues about the Fed’s path at a time of unusually high economic uncertainty.

“The markets are currently apprehensive given this uncertain period with many moving parts: the labor market, inflation, virus, the Fed, geopolitical risks, politics,” said Nancy Davis, chief investment officer at Quadratic Capital Management. “It is unclear if tightening rates will be enough to keep inflation under control given the supply chain disruptions and labor market.”

Powell rattled the markets Wednesday, when he said the bank is likely to start raising rates in March and opened the door to more frequent and potentially larger hikes than anticipated. His comments sparked a sharp rise in policy-sensitive Treasury yields, driving those on two-year notes up to as much as 1.2% from around 0.7% at the start of the year.

Some hedge funds and traders betting on shifts in the shape of the yield curve were caught by surprise, forced to exit with sharp losses in the past week. And a closely watched measure of expected Treasury volatility is heading back toward last year’s highs.

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Powell has “refused to commit to the kind of step-by-step gradualism that accompanied the last two rate-hiking cycles,” Michael Darda, chief economist at MKM Partners, wrote in a note. “Markets like certainty and continuity and both have been summarily rug-pulled.”

The markets are now pricing in roughly five quarter-point rate hikes for this year, up from three such shifts anticipated in late December. Bank of America Corp.’s economists are among those who expect a more aggressive path, predicting that the Fed will raise rates at each of its seven remaining meetings this year.

Another wild card: the potential for the Fed to start off with a 50-basis-point move in March, the kind of tightening last seen when the overnight rate peaked in 2000.

“A 50 basis point hike in March is not out of the question,” said John Brady, a managing director at R.J. O’Brien, a futures broker in Chicago, noting how deeply negative inflation-adjusted, or real, interest rates are. “Shifting the real funds rate to -6.5% from -7% is not going to break the economy, and it may in fact help risk assets by reinforcing the Fed’s credibility on inflation.”

There’s likely to be little near-term certainty given that the next central bank meeting isn’t until mid-March. The January employment report due on Friday will be closely watched for signs of whether wage pressures are accelerating as employers struggle to fill job vacancies. Average hourly earnings are forecast to have risen 5.2% over the past year, well above the 2019 pace of around 3.5%.

“The Fed is doing what they need to do after a 7% inflation print,” said Jason Pride, chief investment officer for private wealth at the Glenmede Trust Co. “They need to go hard. They don’t have a choice. By jawboning the economy and the market they are hoping that in time it will reduce the need to tighten policy.”

Among the important events for the bond market in the coming week is the Treasury debt refunding announcement on Wednesday, when it will reveal the scale of its upcoming bond offerings. Dealers are widely expecting Treasury to cut longer-term nominal debt sales.

Another source of uncertainty is the Fed’s plan to shrink its nearly $9 trillion stockpile of assets by not buying new Treasury and mortgage bonds when old ones mature, a shift expected later this year after it starts raising rates. It’s possible that the Fed could use that to drive up longer-term interest rates. The difference between five- and 30-year yields has narrowed to less than half a percentage point, which apart from the bout of extreme volatility in March 2020, is the flattest since the start of 2019. Those 30-year yields are at a level that’s seen as too low to significantly slow the economy and the hot housing market.

“There is a need to shift the entire curve higher in order to tighten financial conditions,” said Gregory Faranello, head of U.S. rates trading at AmeriVet Securities. “A challenge for the Fed is that a flattening yield curve will prompt recession calls, and optically that is not good for them.”

Beyond the current market swings, there’s the potential for a steeper selloff once the Fed has a couple of hikes in place and the balance sheet is starting to shrink, he said. “If inflation is not co-operating, once the Fed has tightened a few times, the market will need to reprice.”

What to Watch

  • Economic calendar:

    • Jan. 31: Chicago PMI, Dallas Fed manufacturing survey

    • Feb. 01: Markit U.S. manufacturing PMI, ISM survey, JOLTS job openings

    • Feb. 02: ADP employment, MBA mortgage applications

    • Feb. 03: Weekly jobless claims, Markit U.S. services PMI, factory orders

    • Feb. 04: January employment report

  • Fed calendar:

    • Jan. 31: San Francisco Fed President Mary Daly speaks at Reuters live event

    • Feb. 03: Fed nominees Sarah Bloom Raskin, Lisa Cook, Philip Jefferson appear before Senate

  • Auction calendar:

    • Jan. 31: 13- and 26-week bills

    • Feb. 03: 4- and 8-week bills

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