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As the Federal Reserve hiked its policy rate by over four percentage points in 2022 to tackle rising inflation, the U.S. Treasury market registered a record annual loss during the year.
What Happened: The U.S. bond market index declined 12.5% during the year, the most in its history, reported Bloomberg. The worst months for the index were September (-3.45%), March (-3.11%) and April (-3.10%), the report said.
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Yields hit their highest in the October-November period following which they started declining as inflation began to show moderation and Federal Reserve officials slowed the pace of policy tightening.
Inversion: The yield curve inverted, with rates for five-year treasury notes first surpassing those for 30-year securities in March, while the gap between two- and 10-year yields also flipped. The report said that these inversions hit historic extremes, implying that investors anticipate high short-term yields to cause economic damage.
The inversion of the two- to 10-year curve hit as much as 85.2 basis points on Dec. 7, before concluding 2022 at close to 56 basis points. The five-year premium over the 30-year rate at one point hit as much as 46.8 basis points, the report stated.
The Vanguard Total Bond Market Index Fund ETF (NASDAQ:BND) and the iShares Core US Aggregate Bond ETF (NYSE:AGG) lost over 14% in the last one year.
2023 Outlook: For 2023, many US interest-rate strategists believe that as long as labor-market conditions soften and inflation declines further, treasuries will extend their recent rally, taking yields lower and steepening the curve in the second half of the year, the report said.