The collapse in Treasury bonds is one of the worst market crashes in history, and more downside could still be looming.
Four market veterans told Insider what could come next and how the bond market could ripple through stocks and the economy.
Experts forecast that a recession could hit in 2024 and 10-year Treasury yields could breach 5.5%.
The bond market has endured a brutal bloodbath that ranks among the worst asset sell-offs in history, and Wall Street veterans still expect more pain and volatility to come.
Since March 2020, Treasury bonds with maturities of 10 years or more have tanked 46%, and losses on the 30-year bond are down 53%, Bloomberg data shows. Those line up with stock crashes of the dot-com era and 2008.
Mike Sanders, the head of fixed income at Madison Investments, attributed the losses to the Federal Reserve’s higher-for-longer stance on rates, with oil prices, inflation, political drama, and government spending also not helping.
“The shift in growth expectations and the Fed removing cuts in 2024 and 2025 was an ‘aha moment’ for bond markets,” he told Insider. “It signaled to investors that the Fed means business.”
He added that the prospect of a tighter outlook on rates suggests a higher likelihood of recession, and yields could still run higher.
He isn’t alone in his forecast, which came before Friday’s jobs report sent the 10-year Treasury yield past 4.8% again, retaking 16-year highs reached earlier in the week.
“Bond pain will ratchet up to over 5% in the coming months for the 10-year,” Eric Schiffer, chief executive of private equity firm Patriarch Organization, told Insider.
And Phillip Colmar, global strategist at MRB Partners, predicted they could even breach 5.5% in 2024, saying the Fed previously suppressed longer-term yields with overly optimistic inflation views and low estimates for a neutral policy rate.
All this makes it difficult to have any near-term conviction in bonds, said Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors. He noted that a potential government shutdown in November could bring additional downside for investors and push yields higher.
“Although recent data suggests a soft landing is possible, we believe a moderate recession has merely been delayed rather than avoided,” Phillips explained.
One other consequence of the bond market collapse, in Colmar’s view, is that long-term yields are now doing the heavy lifting for the Fed, as far as tightening financial conditions. That could lower the odds of an additional interest rate hike.
In fact, markets see a nearly 80% chance the Fed keeps rates unchanged at its November meeting, CME’s FedWatch Tool shows.
Meanwhile, Schiffer warned risks loom for stocks while the bond market goes haywire.
“Interest rate gravity and the dislocation of bond value should cause a brutal bloodbath for stocks if valuations return to rationality among a gross historical disparity with bond prices,” he said.
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