Stock markets remained volatile last week as global bond yields spiked to pre-pandemic levels.
Just a few months ago, markets were undecided as to whether the Federal Reserve would raise rates at all in 2022. Now, four US rate hikes are expected. Some think even that may be an underestimate.
JPMorgan chief executive Jamie Dimon thinks high inflation may force the Fed to raise rates six or seven times this year, while billionaire hedge fund manager Bill Ackman says the Fed should consider a "shock and awe" move and go for a half-point rate hike in March.
A half-point hike remains unlikely. Quarter-point moves have been the norm over the last two decades and the Fed hasn’t hiked rates by half a point since May 2000. Additionally, rates will remain low by historical standards.
Still, the speed of the market U-turn is notable. Looking at 10 major economies, Bespoke Investment notes the one-month change in bond yields ranks in the top few per cent of all monthly changes over the past two decades. For UK gilts and Canadian bonds, the move ranks in the top 1 per cent of all monthly moves over that period.
Bulls counter that in recent decades higher bond yields have usually been accompanied by higher stock prices.
However, the sheer pace of the advance is problematic, cautions Renaissance Macro Research, which says surging bond yields have tended to pressure stocks over the following six months.
Last year, the S&P 500’s worst peak-to-trough drawdown was just 5.2 per cent, but 2022 has exceeded that already. It looks like a bumpy ride lies ahead.