The resilience of the US bond market

Admittedly, US debt lost almost 13% in 2022 as the Fed raised its target interest rate on overnight lending between banks seven times, from 0.25% to 4.50%, in an unprecedented tightening in nearly 110 years. However, in relative terms, US bonds outperformed benchmarks for fixed-income assets globally.

The bond market’s relative confidence in the Fed shows no signs of weakening, even with the exogenous economic fallout from the Russian invasion. As persistent as inflation has been, it was the 10th slowest among 34 developed economies in the third quarter and below the average for European countries.

Zero-coupon inflation swaps, where part of the transaction pays a fixed payment calculated on the inflation bet in exchange for the amount based on actual inflation, continue to endorse Powell’s commitment to restoring stability prices. These transactions show consumer price inflation of 5.9% next month, 2.4% in six months, and 2.3% in one year.

No major economy has rebounded as quickly or recovered as much as the United States from the pandemic. After the Fed radically reversed its position. Many experts had incorrectly predicted that a recession would occur this year. They continue to make the exact forecasts for the coming year. We cannot exclude that the consequences of monetary policy will not affect the economy in the coming months. It could take 18 months to measure the results of such a rapid and massive rate increase.

Following the last FOMC meeting, the FED released new projections showing that they expected inflation to be higher in 2023 than they previously thought (3.1% versus 2.8%). Still, their forecasts are too optimistic. The Fed will likely approach the new year with much more determination than the market anticipates. This could lead to an appreciation of the dollar, also strengthened by a better growth differential with the rest of the world.

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