A Treasury 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.
The yield on the 10-year US Treasury note, which rises as the price of the global government debt benchmark falls, climbed 0.07 percentage points to 1.84 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 1.03 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 Chase chief executive Jamie Dimon “casually suggesting last week that [policymakers] 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.
The Bank of Japan on Tuesday lifted its inflation projections, adding impetus to the rise in yields. Typically the most dovish of the world’s major central banks, the BoJ said the risks around its forecast were 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 Padhraic Garvey, ING analyst.
Wall Street’s Nasdaq Composite share gauge, which is stacked with tech groups and other highly valued growth companies, dropped 1.7 per cent. The broader S&P 500 share index fell 1.4 per cent.
As well as the prospect of rising interest rates, which can rapidly affect equity valuations when the rate of change in borrowing costs is expected to be fast, investors are grappling with a slowdown in corporate earnings growth following a rebound last year from the shocks of 2020.
Analysts polled by data provider FactSet expect companies listed on the S&P 500 to report aggregate profit growth of 22 per cent for the final quarter of December, year-on-year, compared with 40 per cent in the preceding three-month period.
Shares in Goldman Sachs fell 8 per cent on Tuesday, heading for their largest daily fall since June 2020, after the investment bank’s quarterly earnings undershot analysts’ forecasts.
Stock markets initially rose after data last week showed US inflation hit an annual rate of 7 per cent in December, though it 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 exporter of goods, 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.
In Europe, the regional Stoxx 600 share index fell 1 per cent as its tech sub-index dropped 2.2 per cent.
Germany’s 10-year Bund yield, a benchmark for European business and household borrowing costs, traded at minus 0.01 per cent on Tuesday as it remained close to climbing above zero for the first time since 2019.
Russia’s main stock exchange lost 6.5 per cent on Tuesday, putting the Moex on course for its worst day since early 2020. A broader FTSE index of emerging market stocks declined 1 per cent.
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.
Brent crude, the oil benchmark, rose 0.8 per cent to $87.18 a barrel — reaching its highest level since 2014.
The dollar index, which measures the US currency against six others, rose 0.5 per cent.