Yields on US government debt rose to their highest level in more than a decade on Monday as investors rallied 0.75 percentage points for the third consecutive time from the Federal Reserve on Wednesday.
The return on 10-year US government debt, a benchmark for global borrowing costs, rose above 3.5 percent for the first time since April 2011 as investors sold bonds. The yield on the two-year Treasury note rose to a 15-year high of 3.94 per cent. While the two-year yield tracks interest rate expectations particularly closely, the entire spectrum of yields has increased as expectations set for longer periods of higher borrowing costs.
On Wall Street, the broader S&P 500 closed 0.69 percent higher on Friday, while the technology-heavy Nasdaq Composite rose 0.76 percent. Europe’s region-wide Stoxx 600 slipped 0.1 per cent.
The weak performance on Monday comes after MSCI’s broad index of developed and emerging market stocks fell 4 per cent last week in the biggest weekly decline since June. Concerns about the health of the global economy and fears of more big rate hikes by major central banks have scared investors.
“It feels like a make-or-break week. The reassessment we did last week has residual anxiety and there is no sense that sentiment is getting any better,” said Sammy Char, chief economist at Lombard Odier.
Among currencies, the dollar rose about 0.1 percent against a basket of other currencies. Powerful surge in recent months which was driven by the rise in US interest rates.
“The money market is probably best summarizing how close we are to some kind of breaking point,” Char said. “The big question will be whether we will get some positive signal from central banks about when their hiking cycles will peak. , , You don’t see many avenues through which the Fed can be reassured. ,
The consensus expectation on Wall Street is that the Fed will raise interest rates by 0.75 percentage points at the end of its two-day meeting on Wednesday. Market forecasts for a third consecutive growth of that magnitude were fueled last week by data showing US consumer price inflation being cooler than expected in August.
Pricing based on Federal Fund futures suggests the Fed will raise its key interest rate to 4.4 percent in the early months of 2023, up from the current range of 2.25 percent to 2.5 percent, as policymakers try to calm inflation. Huh.
There is growing fear among investors that the central bank’s efforts to contain inflation coupled with monetary tightening will drag the US economy into recession as debt servicing costs rise for companies and individual borrowers.
The yield on 10-year, inflation-linked US notes, which shows what investors can expect to receive after accounting for inflation, reached a peak of 1.16 percent, the highest since 2018. The so-called real return was around minus 1 per cent. Cents at the start of the year, flattering the valuations of fast-growing tech companies that make up a large load on US stock indices.
The Japanese yen fell 0.3 percent to 143 against the dollar, hitting a 24-year low last week before the government stepped up its verbal intervention aimed at soothing the country’s currency market.
The Bank of Japan is set to make its latest policy decision on Thursday. Most economists expect the BoJ to stick with keeping the 10-year bond yield near zero as it attempts to foster more sustainable inflation in an economy that has been through decades of weak price growth.
The Bank of England is also set to announce its decision on interest rates on Thursday, with the consensus among City of London analysts pointing to a 0.5 per cent increase in forecasts.
Asian shares also fell, with the MSCI gauge of stocks in the region falling nearly 0.4 per cent. Equity markets in the UK and Japan remained closed for public holidays.