A global bond sell-off reignited on Tuesday as investors cranked up their bets on monetary tightening from the Federal Reserve, with markets for the first time pricing in four interest rate increases from the US central bank this year.
Treasury yields jumped to a two-year high as traders returned from the long weekend in the US, dragging down equity markets and worsening a downturn for technology shares.
The yield on the 10-year US Treasury note, which rises as the price of the global government debt benchmark falls, climbed 0.05 percentage points to 1.82 per cent as prospects of higher rates on cash deposits and sustained inflation made the security’s fixed-interest payments less appealing.
Meanwhile, the yield on the two-year Treasury note, which closely tracks interest rate expectations, rose 0.07 percentage points to 1.04 per cent — a level not seen since February 2020.
“There’s speculation about increasing aggression from the Fed,” said James Athey, a portfolio manager at Aberdeen Standard Investments.
This mood, he said, was “kick-started” by JPMorgan chief executive Jamie Dimon “casually suggesting last week that they could hike six or seven times this year, and the move has gathered momentum”.
The US central bank has tethered its main funds rate close to zero since March 2020, but interest rate futures contracts show traders expect it to exceed 1 per cent by December.
Analysts said the Bank of Japan, which on Tuesday lifted its inflation projections, added impetus to the rise in yields. The BoJ, typically the most dovish of the world’s major central banks, said the risks around its forecast are now “balanced” rather than “skewed to the downside”, a phrase it has used since 2014.
The shift in language “lets markets envision a world where the BoJ takes its foot off the monetary easing accelerator”, said ING analyst Padhraic Garvey.
Stock markets declined, with Europe’s Stoxx 600 share index down 1.2 per cent, dragged lower by a 2.1 per cent fall by its tech sub-index stocks, and London’s FTSE 100 down 0.7 per cent.
Futures contracts that bet on the direction of Wall Street’s Nasdaq 100, which is stacked with tech and other highly valued growth companies that are sensitive to expectations of tighter monetary policy, dropped 1.8 per cent. Those tracking the broader S&P 500 index fell 1.2 per cent.
Equity investors are also grappling with slowing corporate earnings growth following a rebound in 2021 from the coronavirus-induced economic shocks of the previous year.
Meanwhile, analysts surveyed by data provider FactSet expect S&P-traded companies to report aggregate earnings growth of 22 per cent in the fourth quarter, year on year, compared with 40 per cent in the preceding three-month period.
Germany’s 10-year Bund yield, a benchmark for European business and household borrowing costs, traded at minus 0.02 per cent on Tuesday as it remained close to climbing above zero for the first time since 2019.
Stock markets initially rose after data last week showed US inflation hit an annual rate of 7 per cent in December, but was also moderating on a month-by-month basis.
But new fears of prolonged price rises caused by supply chain bottlenecks have emerged after authorities in China, a big goods exporter, reacted to the spread of the Omicron coronavirus variant with fresh lockdowns and travel controls.
“That now is starting to cause some concern on the supply chain crunch,” said Randeep Somel, portfolio manager at M&G. “It could go the other way just at the point a lot of western economies are going to go full throttle and reopen everything again.”
In Asia, Hong Kong’s Hang Seng share index fell 0.4 per cent and the Nikkei in Tokyo closed 0.3 per cent lower. The yen traded at close to a five-year low against the dollar after the Bank of Japan opted to keep its main interest rate negative.
Brent crude, the oil benchmark, added 1.3 per cent to $87.57 a barrel — reaching its highest level since 2014 on Tuesday.