JTreasuries and related exchange-traded funds gained ground as recessionary concerns helped dampen expectations of further aggressive monetary policy tightening from the Federal Reserve.
Thursday, the Vanguard Extended Duration Treasury ETF (EDV) increased by 0.6%.
“We continue to believe that we are not yet out of the woods in the face of the pressure that inflation and rate hikes will impose on the economy, and continue to recommend a defensive position within risk assets to make the unfolding downturn,” Matt Peron, director of research at Janus Henderson Investors, told Bloomberg.
According to the Commerce Department, gross domestic product in the United States shrank at a seasonally and inflation-adjusted annual rate of 0.9% during the second quarter, after contracting 1.6% during of the first trimester. With two consecutive quarters of declining GDP, the US economy has now entered what is commonly defined as a recession.
The current economic weakness is “really only a matter of time,” given high inflation, weak stock markets and “the housing downturn is currently accelerating,” the economist said. ING James Knightley to The Wall Street Journal, adding that it “reinforces the feeling that it is only a matter of time before we are in a real recession.
Consequently, Treasury market watchers expect the Fed to moderate its aggressive monetary policy.
“Growing skepticism that aggressive Fed tightening will continue has been reinforced” by GDP data, Ian Lyngen, head of US rates strategy at BMO Capital Markets, told Bloomberg.
Some market watchers have also argued that bond investors may find greater opportunities at the shorter end of the yield curve.
“There is great potential value in the short-term Treasury market right now,” Michael Wagner, co-founder of Omnia Family Wealth, told Bloomberg.
However, this period of weakness could also mark an inflection point as policymakers help turn the economy around.
“We are seeing a sharp and necessary deceleration rather than a recession,” David Mericle, chief U.S. economist at Goldman Sachs, told the WSJ, adding that the slowdown is needed to rebalance the economy. “I wouldn’t say that we appear to be in contractionary territory on a future basis.”
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