December 20, 2021 | By Hank Cunningham
While the Federal Reserve Board has signaled that it will end its bond-purchasing program in early 2022 and will follow that with as many as three hikes in the Federal Funds Rate, long-term bond yields have fallen, creating a flatter yield curve in the process. Even the Fed has acknowledged that the recent surge in inflation is not transitory. There appears to be a consensus that the easing of supply-chain snarls may lead to a subsiding of headline inflation. However, the extraordinary tightness in the labour market is beginning to manifest itself into increases in wages. If this becomes a trend, it should translate into elevated inflation for longer.
The recent variant outbreak may affect global economic growth, but for now, conditions are vibrant.
It is unlikely that long-term bond yields will resume their uptrend in the short run. Thus, the “lower for longer” argument remains alive and well. Investors may look to benefit from rising short-term yields. Since September, anticipating some tightening by the Fed, U.S. two-year yields have leaped by 40 basis points, while the ten-year has risen only marginally.
Central Banks are in line with the Fed. The Bank of England has raised its key rate, while the Bank of Canada is not far behind. Thus, it appears likely that we will have multiple rate hikes in 2022, with some moderation in inflation.
Fixed income investors will continue to be frustrated by the poor returns available in the bond market.