(Bloomberg) -- The fastest inflation in almost 40 years is pushing the Federal Reserve to act fast, and financial markets are signaling the central bank will tighten policy furiously, spurring losses in many asset classes, said Jim Bianco.
The spike in Treasury yields this year has “been a huge move and a tremendous total return loss,” the founder of Bianco Research told Bloomberg Television’s Surveillance on Wednesday. While anticipated higher rates are hurting financial assets, the Fed’s pledge to stop its pandemic-era bond-buying program will really deliver a blow, he added.
“Quantitative tightening most hurts risk markets like the equity market, the corporate bond market,” Bianco said. The Treasury “market had a $1.5 trillion buyer, and if they are going to leave, it needs to find a $1.5 trillion buyer, and the bond market will. It will take it away from the corporate-bond market and the equity market. Those markets are going to struggle.”
The Bloomberg US Treasury Total Return Unhedged USD Index has lost more than 2% so far in January, and indexes measuring returns on investment-grade and high-yield U.S. corporate bonds are down. The S&P 500 Index has dropped 4%.
“The Fed did wait way too long in trying to address this issue,” said Bianco. “I don’t think there is a magic policy they could do that would help quell the inflation concerns, help the financial markets, help the economy at the same time. Because everybody is concerned about inflation, they ultimately are going to respond to it, and the risk is that they’re going to go too far.”
With traders increasingly pricing in a March liftoff for rate hikes followed within months by the start of the Fed running down its bond portfolio, investors have become increasingly leery. Back in 2017, the Fed began normalizing its balance sheet almost two years after it lifted its short-term policy rate from near zero. And it reduced its bond inventory in baby steps. Policy makers have made clear they’ll be going faster this time.
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