Government bond markets swung on Tuesday after Australia kicked off a busy week for central banks with a bigger than expected rate rise, and traders debated the economic consequences of the US Federal Reserve increasing borrowing costs.
The yield on the 10-year US Treasury note, a benchmark for asset pricing and loan rates worldwide, softened to 2.92 per cent after hitting 3 per cent on Monday for the first time since 2018. Bond yields rise as their prices fall.
The dollar index, which measures the US currency against six others and hit a 20-year high last week, dropped 0.4 per cent.
The moves came ahead of the Fed’s monetary policy meeting, which concludes on Wednesday. The world’s most influential central bank is expected to announce an extra large rate rise of about half a percentage point, with markets pricing in similar half-point rises at the subsequent two meetings, after US consumer price inflation reached 8.5 per cent in March.
“We do not see much room for dovishness at the May meeting,” Standard Chartered strategist Steven Englander said in relation to the Fed. “It took a while” for the Fed’s rate-setters to “reach a consensus” on the need to tighten monetary conditions to try to quell demand, he added. “And we don’t see an incentive for that consensus to break.”
The Fed was also likely to “send a clear signal that they are prepared to control the inflationary pressure in the US”, added Ron Temple, head of multi-asset at Lazard, which might provide a reason to buy back into government debt. While higher interest rates on cash lessen the appeal of fixed income-paying bonds, prospects of inflation being tamed can make them seem more attractive.
Germany’s 10-year bond yield, which started the year below zero, exceeded 1 per cent for the first time in seven years in European morning trading before settling back down to 0.96 per cent. The UK equivalent crossed 2 per cent briefly before trimming some of its gains to trade at 1.95 per cent.
The shake-out in bond markets came after the Reserve Bank of Australia raised interest rates for the first time in more than a decade on Tuesday, increasing borrowing costs by a higher than anticipated 0.25 percentage points and citing inflation that had “picked up more quickly, and to a higher level, than was expected”.
The yield on Australia’s 10-year bond hit 3.4 per cent, a level not reached since 2014, while its more policy-sensitive two-year yield rose by more than 0.19 percentage points to 2.77 per cent.
The Bank of England is also expected to raise UK interest rates to their highest level since 2009 on Thursday. BoE governor Andrew Bailey said last month that the rate-setting institution was walking a “very, very fine line” between tackling consumer price increases and avoiding recessionary risks from lifting borrowing costs too far.
Sterling added 0.1 per cent against the dollar to $1.25.
In equity markets, Wall Street’s benchmark S&P 500 share index was up 0.5 per cent by lunchtime in New York. The technology-focused Nasdaq Composite, which last month registered its worst monthly drop since 2008 as tighter financing conditions dented the appeal of speculative assets, was down 0.1 per cent.
The regional Stoxx Europe 600 share index closed 0.5 per cent higher, with its banking sub-index gaining 2.7 per cent.
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