Some believe the subtle shift in central bank behavior witnessed over the past month means bonds are in the early innings of what could ultimately be a rebound after a singularly poor year.
I won’t venture any predictions, although I will reiterate the obvious: Between the ECB’s slightly softer statement language, the Bank of Canada’s step down and the RBA’s deescalation, it does seem as though policymakers are becoming more concerned about “long and variable” lags. More colloquially: Officials are worried they’ve already created latent recessions.
Consider that 2022 has seen more than one policy rate hike for every, single trading day, according to BofA (figure below).
Seen in that light, it’s a miracle stocks haven’t fallen more. The bond market is “now pivoting from inflation to recession,” BofA’s Michael Hartnett said, calling recent “blinks” from central banks an argument for a Q4 “Bear Hug,” where that means a rally in risk assets, even if it proves to be yet another false dawn. The bank still sees new lows for equities and new wides for credit early next year.
That said, 2023 should be a “better year for asset returns than 2022,” Hartnett wrote, adding that “government bond returns are almost certain to be positive.” He called that “obvious.”
In a year defined by striking statistics and factoids, the bond market stands out as especially remarkable. US Treasurys are annualizing a 23% loss YTD, the worst since 1788 (figure below).
If you’re wondering when Treasurys last saw two straight years of losses, it was 1958-59, Hartnett observed, on the way to noting that the last time Treasurys suffered a 5% loss or more followed by a negative return was 1861.
The last time US government bonds (as measured by Global Financial Data, which builds indexes by appending historical records to more conventional series) suffered three straight years of losses was — drumroll — never.
A narrative shift “from uber-bearish ‘inflation shock’ and ‘rates shock'” to recession, along will “bull catalysts of peak CPI, peak Fed, peak yields and peak US dollar” would be “very good for Wall Street if consensus forecasts for ‘hard landing’ in inflation and ‘soft landing’ in growth prove accurate,” Hartnett wrote, of 2023.
If you ask BofA, though, the upside is likely to be “much more constrained due to a ‘soft landing’ in sticky inflation and a ‘hard landing’ in growth.”
