** International Communique No. 333 – 12th of April 2022


The recent uptrend in US bond yields continued apace; particularly at the long end of the curve, with the 10-year yield rising by 32 basis points. Investors were reacting to remarks by some of the Fed’s top brass suggesting that more stringent monetary tightening was in the works than had been expected.

FOMC member Lael Brainard, who is slated to become the next Fed Vice Chair at the behest of Joe Biden, made it clear that the Fed’s overriding mission was to curb the intense inflationary pressures visible in the US since mid-2021. Latest year-on-year inflation was 7.9% in February – a level not seen since the early 1980s. In the same month in 2021, the figure was just 1.7%. This inflation-busting attitude unsettled markets because Ms Brainard was previously perceived as a dove (i.e. fairly tolerant of inflation, unlike her hawkish peers).

Similarly, James Bullard, President of the Missouri Fed, drove the message home by announcing that he would like to see Fed funds up at 3-3.25% in the second half of the year compared with 0.25-0.50% at the moment.

Bullard is a notorious hawk but the news nonetheless rattled investors. He then commented that several FOMC members would have voted for a half-point hike at the latest meeting in March, instead of the quarter-point increase, had Russia not attacked Ukraine. These remarks further put the wind up investors.

The tensions affecting US yields recently helped the dollar, which appreciated by 1.6% against the euro and 0.9% against the Swiss franc.

US and European equities weathered the sharp rise in long-term yields relatively well, with the S&P 500 posting a weekly decline of only 0.1% while the Stoxx 600 succeeded in gaining 0.6%. Explaining this recent resilience was the lack of alternatives to equities, unchanged expectations of strong earnings growth in 2022 and the consensus view that the Fed is capable of cooling down inflation without hurting economic growth or upsetting Wall Street. That is also why equities have not fallen back too far year to date despite the deterioration in bond markets and the surge in geopolitical exposures.

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