U.S. government debt yields hit the highest levels in more than a decade on Monday as investors braced for a third straight 0.75 percentage point hike from the Federal Reserve on Wednesday.
The yield on US 10-year government debt, a benchmark for global borrowing costs, rose above 3.5% for the first time since April 2011 as investors sold the bonds. The yield on the two-year Treasury note hit a 15-year high of 3.94%. While the two-year yield tracks interest rate expectations very closely, the entire yield spectrum has soared as expectations of a longer period of high borrowing costs set in. are installed.
On Wall Street, the broad S&P 500 closed up 0.69% while the tech-heavy Nasdaq Composite gained 0.76% on Friday. The regional Stoxx 600 in Europe fell 0.1%.
Monday’s subdued performance comes after the broad MSCI index of developed and emerging market stocks lost 4% last week in its biggest weekly decline since June. Concerns about the health of the global economy and the specter of further large rate hikes from major central banks spooked investors.
“It looks like a breakthrough week. There is residual anxiety from the price revision that we experienced last week and there is no sense that sentiment is turning to anything better,” said Samy Chaar, chief economist at Lombard Odier. .
In currencies, the dollar appreciated about 0.1% against a basket of other currencies, extending a strong surge in recent months that had been fueled by rising US interest rates.
“The currency market probably best sums up how close we are to some sort of breaking point,” Chaar said. “The big question will be whether we get a positive signal from central banks as to when their bull cycle peaks. . . You don’t see a lot of avenues where the Fed could be reassuring.
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 expectations for a third consecutive rise of this magnitude were bolstered last week by data showing that consumer price inflation in the United States cooled less than expected in August.
Pricing based on fed funds futures suggests that the Fed will raise its main interest rate to 4.4% in the first months of 2023, from the current range of 2.25% to 2.5%, as policymakers attempt to rein in inflation.
Investors are increasingly concerned that the central bank’s efforts to tame inflation through monetary tightening could push the U.S. economy into recession as debt servicing costs rise for businesses and individual borrowers .
The yield on U.S. 10-year inflation-linked notes, which indicate the returns investors can expect to receive after accounting for inflation, hit a high of 1.16%, the highest since 2018. So-called real returns were around minus 1 percent. cent at the start of the year, flattering the valuations of fast-growing technology companies that represent a significant weight in US stock indexes.
The Japanese yen slipped 0.3% to ¥143 against the dollar after hitting a 24-year low last week before the government stepped up verbal intervention aimed at easing the country’s foreign exchange market.
The Bank of Japan is expected to make its final policy decision on Thursday. Most economists expect the BoJ to keep 10-year bond yields near zero as it tries to stoke more sustainable inflation in an economy that has weathered decades of sluggish price growth.
The Bank of England is also expected to announce its interest rate decision on Thursday, with consensus forecast from City of London analysts pointing to a 0.5 percentage point hike.
Asian stocks also fell, with an MSCI gauge of stocks in the region down around 0.4%. Stock markets in the UK and Japan were closed for public holidays.
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