Lower prices for U.S. government bonds continued to weigh on global debt markets on Thursday, as investors anticipate rising inflation resulting from the resumption of the coronavirus pandemic.
The yield on the US 10-year benchmark bond rose 0.05 percentage point to 1.4490% – a new high in one year – despite Federal Reserve Chairman Jay Powell on Wednesday minimize the threat of rising consumer prices, indicating a slowdown in the US labor market.
Australian and New Zealand government bonds were the main victims of the sale. Australia’s 10-year security yield rose 0.13 percentage points to 1.86%, its highest level since May 2019.
The yield on New Zealand benchmarks climbed more than 0.18 percentage point to just over 1.85%, after declaration by Finance Minister Grant Robertson that the Reserve Bank of New Zealand should take into account overheating house prices when setting interest rates.
“Investors saw this change as a restriction on the ability of the RBNZ to pursue ultra-easy monetary policy,” commented Chris Scicluna, economist at Daiwa.
Inflation expectations in the United States, derived from the prices of inflation-protected government securities, stand at just under 2.2% as President Joe Biden tries to push through his stimulus bill against the $ 1.9 billion coronavirus by Congress.
Germany’s 10-year Bund yield added 0.05 percentage point to minus 0.25% and the UK 10-year gilding yield jumped 0.07 percentage point to 0.80%.
“The main theme of the markets is reflation,” said Gregory Perdon, co-chief investment officer of private bank Arbuthnot Latham. “This causes the bonds to sell off, because if you think inflation is heading towards 2%, there is no reason to own a bond that pays less than that.”
Bond yields have risen rapidly since January, when the Democratic Party took control of the Senate, boosting Biden’s chances of spending big on economic stimulus.
Last March, the Fed started buying at least $ 120 billion in financial assets each month to support markets during the pandemic, pushing the 10-year yield to nearly 0.5% in August and around 0, 9% at the start of 2021.
“The rise has been surprisingly rapid,” said Juliette Cohen, strategist at CPR Asset Management, adding that a sustained surge in Treasury yields inform what investors are willing to pay for corporate stocks, “has made us cautious about US stocks, where valuations are tight.” Since March of last year, the technology-driven Nasdaq Composite Index has risen about 90%.
Inflation bets have supported some stock markets heavily biased towards old economy firms at the expense of faster growing sectors such as tech. The regional Stoxx Europe 600 index is up more than 4% so far in February, while the continent’s banking sector gained 1.5% on Thursday. The Nasdaq Composite is down nearly 2% this week, trailing the Dow Jones Industrial Average, which has risen 1.5% since Monday.
London’s FTSE 100, which added 0.4% on Thursday and is dominated by banks, energy companies and industrial groups, is up more than 4% this month despite a rise in sterling which threatens the profits of the benchmark multinationals which generate the bulk of their income abroad.
In currencies, the Australian dollar, often seen as a proxy for global commodity prices, added 0.3% to just under $ 0.80 – its strongest since February 2018.
Brent, the international benchmark for oil, hit a 13-month high at $ 67.70 per barrel before reducing some of those gains around noon.