A selloff in US government bonds intensified on Wednesday, causing stocks to fall sharply for a second day in a row.
The yield on the 10-year U.S. Treasury bill, which serves as a benchmark for global borrowing costs, climbed nearly 1.5% at one point and stood at 1.47% mid-market. afternoon in New York, up nearly 0.08 percentage point on the day.
Trading in the Treasury has been particularly volatile for a week now – 10-year yields briefly eclipsed 1.6 percent last Thursday – but the rise in yields has accelerated since the start of the year and moves have started to weigh heavily on US stocks. This is especially true for high growth tech companies whose valuations have been underpinned by low rates.
The technology-focused Nasdaq Composite Index was down 2% on Wednesday, in addition to a 1.7% drop the day before. The larger S&P 500 fell 0.7%.
The US Senate has started considering that of President Joe Biden $ 1.9 billion stimulus package, analysts predicting that the huge amount of budget spending will boost not only economic growth but also consumer prices. The five-year break-even rate – a measure of investors’ medium-term inflation expectations – hit 2.5% on Wednesday for the first time since 2008.
Inflation makes bonds less attractive by eroding the value of their income payments.
“I would expect US Treasuries to keep selling,” said Didier Borowski, head of global views at fund manager Amundi. “There is clearly a big stimulus package ahead and I expect a new US infrastructure plan to be passed in Congress by the end of the year.”
Mark Holman, chief executive of TwentyFour Asset Management, said he could see 10-year forward yields trading around 1.75% as the economic recovery gains momentum later this year.
“It will be a very good second half,” he said.
Elsewhere, the yield on UK 10-year gilts rose more than 0.09 percentage point to 0.78%, propelled by expectations of higher borrowing and government spending UK budget.
Sovereign bonds also sold in the eurozone, with the yield on the German equivalent benchmark note rising more than 0.06 percentage point to minus 0.29%. It was an example of “contagion” that was not justified “by the economic fundamentals of the euro area,” said Borowski, where the deployment of coronavirus vaccines in the euro area has been slower than in states United and UK.
The uproar in global government bond markets partly reflects the bets of some traders that the US Federal Reserve will be pressured to tighten monetary policy sooner than expected, impacting the costs of doing business for companies. around the world, although the world’s most powerful central bank has expressed that it has no plans to do so immediately.
Lael Brainard, governor of the Fed, said Tuesday evening that declines in US government bond markets had “caught my attention.” In comments reported by Bloomberg, she said it would take “some time” for the central bank to reduce the $ 120 billion in monthly asset purchases it has made since last March.
After a series of record highs for global stocks as recently as last month, stocks have been “priced to perfection” and “very sensitive” to interest rate expectations that determine how investors assess cash flow future of companies, said Tancredi Cordero, Chief Investment Officer. Kuros Associates strategy store.
The European Stoxx 600 stock index closed 0.1% lower, after the anticipated gains evaporated. The UK’s FTSE 100 rose 0.9%, boosted by the economic support measures in the budget speech.
The mid-cap FTSE 250 index, which is more oriented towards the UK economy than the internationally oriented FTSE 100, ended the session up 1.2%.
Brent crude oil prices rose 2.4% to $ 64.20 a barrel.