Through much of the credit crisis, U.S. Treasury bonds have represented the lone bright spot in blighted financial markets.
The 10-year Treasury yield plunged to 3.28 percent in January, its lowest level in five years. But with inflation rising, investor sentiment is turning bearish on bond prices.
That's because as inflation rises, it can quickly eat up the value of bond payments, which are fixed. That effect in turn makes them less attractive, lowering demand.
As demand falls, yields must then rise to attract investors.
In a survey of 29 fund managers who control $1.45 trillion of assets, Ried Thunberg's weekly sentiment index dipped to 45 for the week ended July 18, down from 47 a week earlier.
A score below 50 indicates investors expect lower prices for 10-year Treasurys by the end of September.
Already, the 10-year yield has rebounded to 4.10 percent. And what has pushed rates higher?
"Clearly, inflation is weighing heavily on investors' minds," Dariusz Kowalczyk, chief investment officer at CFC Seymour in Hong Kong, tells Bloomberg.
"The trend is still for Treasury yields to move higher."
Ried Thunberg's index for the end of December dipped to 46 in the week ended July 18 from 47 a week earlier, and 51 as of July 3.
In the commentary accompanying its weekly survey, Ried Thunberg notes that Federal Reserve Chairman Ben Bernanke testified to Congress that the upside risks to inflation have heightened alongside the prospects for weaker economic growth.
That's not good news for the bond market. Neither were the latest inflation figures.
Producer prices soared 9.2 percent in the year through June, while consumer prices jumped 5 percent.
So it's no wonder that Treasuries recently suffered their worst weekly slide since June, with the 10-year yield flying up 13 basis points to 4.09 percent as of July 21.
"Inflation readings on both the producer and consumer levels were worse than expected," Ried Thunberg points out in its report.
"Financial markets remain under stress and remain a focus for the Fed currently."
The combination of slow growth and surging inflation will keep the Fed on hold through year-end, Ried Thunberg predicts.
At least 90 percent of Ried Thunberg's survey respondents expect the Fed to leave rates unchanged at each of its next three meetings: August, September, and October.
After trimming the federal funds rate from 5.25 percent in September to 2.0 percent in April, the Fed made no rate change at its June gathering.
Fed fund futures point to one central bank tightening before year-end, compared to two last week.
On another question, investors aren't as disappointed with the Fed as some experts' comments might lead you to believe.
A full 42 percent of survey respondents give the Fed a grade of "A" in its handling of and response to the financial crisis, while 41 percent give a "B". The remaining 17 percent give the Fed a "C" grade.
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