Government bonds drop as traders contemplate central bank direction

Global government debt prices tumbled on Tuesday, with the benchmark US Treasury yield scaling levels not seen since late 2019, as traders bet on central banks withdrawing pandemic-era monetary stimulus.

The yield on the 10-year US Treasury note, which underpins global borrowing costs and stock market valuations, rose 0.04 percentage points to 1.96 per cent.

Bond yields, which move inversely to prices, also climbed in the eurozone, the UK, Canada and Brazil ahead of what is expected to be another blockbuster US inflation report on Thursday.

With the US Federal Reserve already having signalled its willingness to raise interest rates from historic lows, data on Thursday are expected to show US consumer prices climbed 7.3 per cent in the year to January, a fresh four-decade high.

“Markets are reeling as the monetary policy stance shifts,” said Tim Graf, head of macro strategy at State Street. “We’re in this precarious area where we don’t really want to gravitate towards anything, except maybe cash, but inflation affects cash too.”

Wall Street’s S&P 500 share index, which has lost more than 5 per cent of its value so far in 2022, eked out a 0.5 per cent rise as gains for banks that benefit from higher interest rates outweighed falls in tech stocks that are sensitive to monetary policy changes.

The tech-heavy Nasdaq Composite index, down about 10 per cent this year, struggled for direction, edging lower before adding 0.9 per cent.

Shares in drugmaker Pfizer fell 4 per cent after it issued earnings forecasts that underwhelmed bullish analysts. But fitness equipment maker Peloton Interactive jumped by a fifth as its chief executive stepped down following a collapse in market value that attracted activist investors and potential bidders.

Markets have priced in more than five quarter-point US rate rises by December. The Fed is also seeking to shrink a balance sheet that has ballooned to about $ 9tn after it unleashed debt purchases in March 2020 to suppress borrowing costs and stimulate the economy. The 10-year yield stood at about 1.2 per cent a year ago.

The two-year Treasury yield, which closely tracks interest rate expectations, rose 0.03 percentage points to 1.33 per cent. The dollar index, which measures the greenback against major currencies, rose 0.2 per cent.

Germany’s 10-year Bund yield, the barometer of wider euro-area borrowing costs that until last month had sat below zero since May 2019rose 0.05 percentage points to 0.27 per cent.

This came despite European Bank President Christine Lagarde having said on Monday that any moves to tackle record inflation in the currency bloc would be “gradual”.

Italy’s 10-year bond yield rose 0.04 percentage points to 1.85 per cent and the UK’s 10-year gilt yield climbed 0.08 percentage points to 1.49 per cent.

Markets last week priced in at least two ECB rate rises this year, sending southern eurozone governments’ borrowing costs to pre-pandemic levels.

“The ECB is trying to moderate its stance and saying that it will act cautiously,” said Juliette Cohen, investment strategist at CPR Asset Management. “But there is a lot of pressure on the ECB, with other central banks moving faster.”

Europe’s Stoxx 600 share index traded flat, having fallen in tandem with Wall Street markets this year.

Hong Kong’s Hang Seng index fell 1 per cent and the Nikkei 225 in Tokyo added 0.1 per cent.

Brent crude, the oil benchmark, fell 2.6 per cent to $ 90.28 a barrel after talks over Iranian sanctions resumed in Vienna.

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