The yield on the 10-year U.S. Treasury hit 3% for the first time in more than three years on Monday, as traders braced for the Federal Reserve to raise interest rates again at a time of soaring inflation and slowing growth.
Government bond yields have a profound impact on the economy, fueling mortgage rates and corporate borrowing costs. The higher yield, which rises when bond prices fall, is tightening financial conditions after two years of the coronavirus pandemic.
The US 10-year yield edged above 3% in early afternoon New York, according to Bloomberg data – double its level at the start of the year and the highest since December 2018. It is then fell back to 2.99%, up 0.05 percentage points on the day.
Yields have risen this year as the Fed takes steps to try to stem US inflation, which hit 8.5% on an annual basis in March, its fastest growth rate in 40 years.
The combination of high inflation and a weakening global economic outlook – the US economy shrank 1.4% year-on-year in the first quarter – raised questions about the Fed’s ability to raise interest rates. interest without overburdening the economy.
Alex Roever, U.S. rates strategist at JPMorgan, said the Fed faces a “thick stew of uncertainties,” including rising labor costs, supply chain issues and commodity prices. commodities that have surged since Russia’s invasion of Ukraine.
“While it’s clear that this economy doesn’t need a stimulus monetary policy, what’s less clear is the speed at which that stimulus needs to be removed and the reasons for choosing that speed,” he said. he added.
The Fed is expected to announce a very large half-percentage point interest rate hike at the end of its May policy meeting on Wednesday, and futures markets are pricing in similar half-point hikes in both next meetings.
US short-term interest rates are now expected to hover around 2.5% by the end of 2022, up from the current range of 0.25-0.5%.
As investors brace for higher interest rates, there are signs of pressure in national economies. Surveys of industry executives released over the weekend showed activity in China’s sprawling factory sector contracted last month at the fastest rate since February 2020, as the country’s economy is reeling from the coronavirus closures.
At the same time, the purchasing managers’ indices published on Monday pointed to a slowdown in the growth of activity in the euro zone and in the American industrial sectors.
The rapid rise in bond yields this year weighed on equity markets by reducing the appeal of riskier investments, and the combination of higher rates and bleak economic data hit equities earlier in the day.
However, US equity indices closed higher as traders took advantage of recent declines to “buy the dip”. The tech-dominated Nasdaq Composite, which in April suffered its worst monthly decline since the 2008 global financial crisis, rose 1.6%. The broader S&P 500 index closed 0.6% higher, after falling 1.7% earlier in the afternoon.
Meanwhile, in Europe, the regional Stoxx 600 index slid as much as 3% before paring losses to trade 1.5% lower.
The initial drop in the regional gauge reflected brief – but steep – declines for Nordic gauges, including the Swedish benchmark OMX 30, which fell 7.9% before recovering to close 1.9% lower. .
A trader attributed the decision to Citigroup for messing up a trade of a basket of stocks including many Swedish names. Citi declined to comment.
Rising Treasury yields helped the dollar index, which measures the U.S. currency against a basket of six others, rise 0.7% to a new 20-year high.