Graphic: Tough going for Treasuries
U.S. Treasuries had a rough first quarter, particularly those at the shorter end of the curve. The Federal Reserve raised short-term interest rates by 25 basis points last month, and members anticipate more raises as the central bank also increased its inflation forecast to 4.3% this year, up from its previous 2.6% projection. At the same time, the Fed has cut back on bond purchases and expects to reduce holdings in the future, which may increase longer-term Treasury yields.
Flattening curve: The two-year yield was 2.47% as of April 7, up 174 basis points from year-end 2021. During the same span, the 10-year yield rose to 2.66% from 1.52%. Based on the implied forward yield, the market is predicting an inverted yield curve at the end of this year.
Treasury yield curve
Index plummets: The Bloomberg U.S. Treasury index lost 5.6% in the first quarter, the worst quarterly return since the index’s January 1973 inception. Most of the index’s composition is geared toward the shorter end of the curve, with more than 50% maturing within five years and more than two-thirds within seven years.
Bloomberg U.S. Treasury index
Inflation concerns: Inflation has heated up since October, increasing an annual 7.9% in February. The five-year breakeven inflation rate is 3.26% and the 10-year rate is 2.82%, above the Fed’s targeted 2% rate. Since March 2020, real five-year and 10-year Treasury yields have been negative.
Breakeven inflation rates**
Pension holdings: Pension funds held about 21% of the Treasury market in 1996 — $914 billion total. At year-end 2021, they owned $3.5 trillion, but their share dropped to 14%. The Fed owned 24% of Treasury securities at year-end, up from 9% in 1996. But with the reduction in bond purchases and plans for lowering holdings, longer-term rates could rise.
Treasury holders by category
*Projections. **Data for 2022 are as of April 7. Sources: U.S. Department of the Treasury; Bloomberg LP; Securities Industry and Financial Markets Association
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