Global government debt prices fell on Tuesday, with the benchmark US Treasury yield scaling levels not seen since late 2019, as traders bet on central banks withdrawing pandemic-era monetary stimulus.
The yield on the 10-year US Treasury note, which underpins global borrowing costs and stock market valuations, rose to a high of 1.97 per cent. Tuesday’s move extends an ongoing upward trend, in which the 10-year yield this year has risen by 0.44 percentage points.
Bond yields, which move inversely to prices, also climbed in the eurozone, the UK, Canada and Brazil ahead of what is expected to be another US report showing high inflation on Thursday.
With the Federal Reserve already having signalled its willingness to raise interest rates from historic lows, data on Thursday are forecast to show US consumer prices climbed 7.3 per cent from January 2021, a fresh four-decade high.
A blockbuster employment report for January has reinforced views that the Fed will be aggressive in its tightening of monetary policy. The stronger-than-expected report, which also included upwards revisions to December and November estimates, suggested that the US economy is strong enough to withstand interest rate increases.
“There is still some reshuffling going on after the employment report and trying to price the right path for the Fed,” said Tom Simons, money market economist at Jefferies, about the ongoing moves in Treasuries.
Wall Street’s benchmark S&P 500 index, which has lost 5 per cent of its value in 2022, rose 0.8 per cent on Tuesday, bolstered by bank stocks, which benefit from higher interest rates.
The tech-heavy Nasdaq Composite index, down about 9 per cent this year, added 1.3 per cent.
Shares in drugmaker Pfizer fell 2.8 per cent after it issued earnings forecasts that underwhelmed bullish analysts. But fitness equipment maker Peloton jumped by 25.2 per cent as its chief executive stepped down following a collapse in market value that attracted activist investors and potential bidders.
Markets have priced in more than five quarter-point US rate rises by December. The Fed is also seeking to shrink a balance sheet that has ballooned to about $9tn after it begun debt purchases in March 2020 to suppress borrowing costs and stimulate the economy. The 10-year yield stood at about 1.2 per cent a year ago.
The two-year Treasury yield, which closely tracks interest rate expectations, rose 0.05 percentage points to 1.34 per cent. The dollar index, which measures the greenback against big currencies, rose 0.21 per cent.
Germany’s 10-year Bund yield, the barometer of wider euro-area borrowing costs that until last month had sat below zero since May 2019, rose 0.04 percentage points to 0.26 per cent.
This came despite Christine Lagarde, European Central Bank president, saying on Monday that any moves to tackle record inflation in the currency bloc would be “gradual”.
Italy’s 10-year bond yield rose 0.07 percentage points to 1.84 per cent and the UK’s 10-year gilt yield climbed 0.08 percentage points to 1.49 per cent.
Markets last week priced in at least two ECB rate rises this year, sending southern eurozone governments’ borrowing costs to pre-pandemic levels.
“The ECB is trying to moderate its stance and saying that it will act cautiously,” said Juliette Cohen, investment strategist at CPR Asset Management. “But there is a lot of pressure on the ECB, with other central banks moving faster.”
Europe’s Stoxx 600 share index closed flat, having fallen in tandem with Wall Street markets this year.
Hong Kong’s Hang Seng index fell 1 per cent and the Nikkei 225 in Tokyo added 0.1 per cent.
