Yields on 10-year U.S. government securities reached 3% for the first time in more than three years on Monday as traders prepared for the Federal Reserve to raise interest rates again amid rising inflation and slowing growth.
Government bond yields have a profound impact on the economy, affecting housing mortgage interest rates and corporate borrowing costs. Higher yields, which rise as bond prices fall, tighten financial conditions two years after the coronavirus pandemic.
10-year US yields rose just over 3% in early afternoon auctions in New York, according to Bloomberg – doubled at the beginning of the year and the highest since December 2018. Later fell back to 2, 99%, an increase of 0.05 percentage points during the day.
Yields have risen this year as the Fed takes action to stem inflation in the United States, which reached 8.5 percent year on year in March, the fastest growth rate in 40 years.
The combination of high inflation and a weakening global economic outlook – the US economy contracted 1.4% year-on-year in the first quarter – has raised questions about how far the Fed will be able to raise interest rates without overwhelming the economy.
Alex Rover, a US interest rate strategist at JPMorgan, said the Fed was facing a “thick stew of uncertainty”, including rising labor costs, supply chain problems and commodity prices that jumped after Russia’s invasion of Ukraine.
“While it is clear that this economy does not need a stimulus monetary policy, what is less clear is the rate at which this stimulus should be removed and the reasons for choosing this rate,” he added.
The Federal Reserve is expected to announce a huge increase in interest rates by half a percentage point at the end of its policy meeting in May on Wednesday, and futures markets are pricing with similar increases of half a point in the next two meetings.
Short-term interest rates in the United States are now expected to be close to 2.5% by the end of 2022, compared to the current range of 0.25 to 0.5%.
As investors prepare for higher interest rates, there are signs of pressure in national economies. Surveys of industry executives released over the weekend showed that activity in China’s sprawling manufacturing sector contracted at the fastest pace since February 2020 as the country’s economy faltered from coronavirus blockade.
At the same time, purchasing managers’ indices released on Monday showed a slowdown in eurozone activity and the US manufacturing sector.
The rapid rise in bond yields this year weighed heavily on stock markets, reducing the attractiveness of riskier investments, and the combination of higher interest rates and grim economic data hit stocks earlier in the day.
However, US stock indexes closed higher as traders took advantage of recent declines to “buy a decline”. The technology-dominated Nasdaq Composite, which suffered its biggest monthly drop since the 2008 global financial crisis in April, rose 1.6 percent. The broader S&P 500 closed 0.6% higher after falling 1.7% earlier in the afternoon.
In Europe, meanwhile, the Stoxx 600 regional index fell as much as 3% before cutting its losses to trade 1.5% lower.
The initial decline in the regional gauge reflects short but steep declines in Scandinavian gauge, including the Swedish benchmark OMX 30, which fell 7.9% before recovering and closing 1.9% lower.
One trader attributes the move to Citigroup, which confuses trading with a basket of stocks that includes many Swedish names. Citi declined to comment.
Rising government bond yields helped the dollar index, which measures the US currency against a basket of six others, rise 0.7 percent to a new 20-year high.
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