U.S. government bonds are off to a hot start in 2022 as some of the yields have climbed to fresh 52-week highs.
The yield on the benchmark 10-year Treasury note has risen to around 1.77 percent. The 2-year yield rallied to about 0.94 percent, while the 30-year bond topped 2.09 percent.
A weak December jobs report, which saw the U.S. economy adding a less-than-expected 199,000 jobs, and the prospect of multiple interest rate hikes this year have contributed to the recent gains in Treasury yields. In addition, investors digested the minutes from last month’s Federal Open Market Committee (FOMC), revealing that officials are prepared to aggressively curtail the central bank’s pandemic-era quantitative easing support and stimulus tools amid rampant price inflation.
The bond market will be combing through the remarks of Federal Reserve Chair Jerome Powell and his testimony in front of the Senate.
"We will use our tools to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched," he said. "We can begin to see that the post-pandemic economy is likely to be different in some respects. The pursuit of our goals will need to take these differences into account."
President Joe Biden tapped Powell in November to serve a second four-year term to guide the economy out of the pandemic.
Lael Brainard, who was selected to serve as the Vice-Chair, will appear in front of the committee Thursday.
However, Goldman Sachs is penciling in at least four rate increases, forecasting moves in March, June, September, and December.
Jan Hatzius, Goldman's chief economist, said in a note that the Fed's minutes exposed a "greater sense of urgency than we had expected" regarding shrinking the balance sheet and raising rates.
“We are therefore pulling forward our runoff forecast from December to July, with risks tilted to the even earlier side,” Hatzius wrote, adding that inflation will likely be "far above target at that point" so trimming the balance sheet will not be the only policy prescription to rein in soaring consumer and producer prices.
As the Fed and other central banks tighten monetary policy, growth stock traders might be fearful that this part of the market could take a beating. This has been on display in recent sessions as the Nasdaq Composite Index, for example, has slumped about 4 percent. But Goldman's strategists believe that the jump in Treasury yields will dissipate, adding that this could be a positive trend for equities.
Others purport that bond investors will need to understand the differentiated policies by central banks better.
The financial institution also predicts that bond investors might need to be patient to pour into U.S. Treasurys.
"With expectations that the U.S. dollar and real yields rise to start the year, we think that investors will get a better entry point later in the year," Hornbach added.
JPMorgan Chase is calling for the 10-year yield to rise to 2 percent by the middle of the year and finish 2022 at 2.2 percent.
Investors are now also looking ahead to the upcoming economic data.
The annual inflation rate for December will be released Wednesday. Economists are penciling in a 7 percent reading.
While market analysts are predicting easing inflation in 2022, one veteran investor thinks that the market is underpricing inflation risks. This, says Mark Mobius, the founder of Mobius Capital Partners, could allow Treasury yields to "go much, much higher."
Where do these market conditions, be it higher inflation or rising yields, leave the greenback?
The U.S. Dollar Index (DXY), which is coming off a 6.5 percent annual gain, has traded flat to start the year. The buck found support on the Delta and Omicron variants and mixed economic data in 2021. JPMorgan expects another good year for the index, with a projected gain of 1.6 percent in 2022, with the dollar's currency rivals, like the euro and the Japanese yen, forecast to underperform.
The many factors and uncertainty surrounding the financial markets might prompt Wall Street to adopt a glass half full outlook for the coming year, strategists say.