Bonds’ Descent Stalls Amid Stock Turmoil

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Treasury yields stabilize as investors worry about an economic slowdown and seek safe assets

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Even before stock declines accelerated, yields had shown some signs of stabilizing, as investors expressed growing confidence that borrowing costs across the economy might have climbed high enough to slow economic growth and inflation. The stock slide, triggered by a group of disappointing corporate-earnings reports, added to investors’ concerns about economic growth, dragging yields still lower.

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The yield on the 10-year Treasury note finished on Friday at 2.785%, well below the high-water mark this year of 3.124% recorded two weeks earlier. In the sessions since that peak, yields have mostly slunk lower in choppy trading, falling on 10 of May’s 15 trading days so far.

Treasurys provide Wall Street with a benchmark for borrowing costs and a baseline return on risk-free investments. Yields tend to rise and fall with traders’ estimates for interest rates over the life of the bonds. The Federal Reserve’s shift to signaling a rapid pace of rate increases early this year sparked a sharp climb in yields that rattled markets, sending mortgage rates soaring, lifting the interest charged on new student loans and driving stocks lower.

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In January, many traders were projecting that the Fed’s benchmark rate would climb gradually from rock bottom, without surpassing a target range of 0.75% to 1% by the end of 2022. In fact, the Fed reached that level early in May, with traders betting more half-percentage-point moves will come in the meetings ahead. On Friday, futures bets showed traders assigning a roughly 85% probability that the Fed will close 2022 with its rate target between 2.5% and 3%, according to CME Group data.

As tighter credit begins to strain growth, it becomes less likely the Fed will move faster than investors now expect, said Frances Donald, global chief economist at Manulife Investment Management. That gives investors more comfort to step in and buy bonds now.

“There’s evidence tightening is having a dampening impact on this economy, and it’s possible that that will do some of the Fed’s work for it,” Ms. Donald said.

The 10-year break-even inflation rate, which reflects investors’ bets on average annual inflation over the next decade, was about 2.6% on Friday afternoon, above the Fed’s 2% target but down from more than 3% a month ago. That marks its lowest level since before the outbreak of war in Ukraine in late February, which sent inflation expectations sharply higher.

As borrowing conditions tighten, however, investors worry more about an economic slowdown. Inflation is racking household budgets, with a parade of major retailers saying last week they are seeing more shoppers eschew expensive purchases even while business costs continue to rise. Higher mortgage rates and record home prices are cooling the real-estate market. More subprime borrowers are missing payments on loans and credit cards.

The result has been a broadening drop in stocks. The yield climb hit Wall Street’s most speculative bets first, by eroding the value that investors place on profits earned far in the future. More recently, disappointing earnings have hurt share prices. Only a late-day rally in the S&P 500 Friday saved the index from its first close in bear-market territory—marking a decline of more than 20% from a recent peak—in over two years, while the Dow Jones Industrial Average notched its first eight-week streak of declines since 1932.

With stocks dropping and anxiety high, locking in returns by buying government debt has been looking better and better, investors said—especially at the higher yields that bonds now offer.

“When you get to 3% yields on the 10-year, that flight to safety becomes available,” said Jason Brady, chief executive of Thornburg Investment Management.

Eagle Asset Management is one of many investment shops that have shifted more money into bonds in recent weeks. James Camp, an Eagle managing director, said that as the economic outlook dims, the fund has reduced stockholdings and put more funds into Treasurys and other high-grade debt.

“We haven’t seen these yields in a number of years,” Mr. Camp said. “We’ve gotten to that inflection point where buyers now can look back to the bond market for income.”

Write to Matt Grossman at [email protected]


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