A Treasury selloff resumed on Tuesday as investors raised their bets on monetary tightening by the Federal Reserve, with markets pricing in four interest rate hikes from the U.S. central bank for the first time this year.
Treasury yields hit a two-year high as traders returned from the long weekend in the United States, dragging stock markets lower and deepening the slowdown in tech stocks.
The yield on the 10-year US Treasury, which rises as the benchmark price of global government debt falls, climbed 0.05 percentage points to 1.82% as the outlook for higher rates on the cash deposits and sustained inflation resulting in fixed interest payments on the security. less attractive.
Meanwhile, the yield on the two-year Treasury bill, which closely tracks interest rate expectations, rose 0.06 percentage points to 1.02%, a level not seen since February. 2020.
“There is speculation about the Fed increasing aggressiveness,” said James Athey, portfolio manager at Aberdeen Standard Investments.
That mood, he said, was “started” by JPMorgan chief executive Jamie Dimon, “offhandedly suggesting last week that [policymakers] could increase six or seven times this year, and the movement has gained momentum”.
The U.S. central bank has kept its key policy rate close to zero since March 2020, but interest rate futures show traders expect it to rise above 1% by December.
Analysts said the Bank of Japan, which raised its inflation projections on Tuesday, gave further boost to higher yields. The BoJ, typically the most dovish of the world’s major central banks, said the risks around its forecast were now “balanced” rather than “downside biased”, a phrase it has used since 2014.
The change in language “leaves markets envisioning a world where the BoJ takes its foot off the monetary easing accelerator,” said ING analyst Padhraic Garvey.
Futures that bet on the direction of Wall Street’s Nasdaq 100, which is stacked with technology and other highly rated growth companies that are sensitive to expectations of monetary policy tightening, fell 1. 6%. Those tracking the broader S&P 500 stock index fell 1%.
Goldman Sachs shares fell 3% in premarket trading after the US bank reported a 13% drop in fourth-quarter net profit, worse than analysts had expected, due to the drop trading income. On Friday, JPMorgan warned that rising costs would hurt its 2022 profits.
European stocks fell, with the Stoxx 600 index down 1.1%, dragged down by a 2.2% drop in shares of its technology sub-index. London’s FTSE 100 lost 0.5%.
In an indication of geopolitical tensions seeping into financial markets, Russia’s main stock exchange lost more than 5% on Tuesday, putting the Moex on course for its worst day since the market tumult of early 2020. FTSE’s broader emerging market shares fell 0.9 percent.
The yield on the 10-year German Bund, a benchmark for European corporate and household borrowing costs, traded minus 0.02% on Tuesday as it remained close to climbing above zero for the first time since 2019.
Stock markets initially rose after data last week showed US inflation hit an annual rate of 7% in December, but also moderated month on month. other.
But fresh fears of prolonged price hikes caused by supply chain bottlenecks emerged after authorities in China, a major exporter of goods, responded to the spread of the Omicron coronavirus variant with new travel locks and controls.
“It is now starting to raise concerns about the supply chain crisis,” said Randeep Somel, portfolio manager at M&G. “It could go the other way just as many Western economies are going to go into full gear and reopen everything again.”
In Asia, Hong Kong’s Hang Seng stock index fell 0.4% and Tokyo’s Nikkei closed down 0.3%.
Brent, the oil benchmark, added 0.8% to $87.15 a barrel, hitting its highest level since 2014.
The dollar index, which measures the US currency against six others, rose 0.2%.