Yields on US government debt reached the highest levels in over a decade on Monday as investors braced for a third consecutive jumbo 0.75 percentage point rate increase from the Federal Reserve on Wednesday.
The yield on 10-year US government debt, a benchmark for global borrowing costs, pushed above 3.5 per cent for the first time since April 2011 as investors sold the bonds. The yield on the two-year Treasury note rose to a 15-year high of 3.94 per cent. While the two-year yield tracks interest rate expectations particularly closely, the entire spectrum of yields has rocketed higher as expectations for a longer period of high borrowing costs have set in.
On Wall Street, the broad S&P 500 closed 0.69 per cent higher while the technology-heavy Nasdaq Composite gained 0.76 per cent on Friday. Europe’s region-wide Stoxx 600 slipped 0.1 per cent.
The subdued performance on Monday comes after MSCI’s broad index of developed and emerging market stocks shed 4 per cent last week in its biggest weekly fall since June. Concerns about the health of the global economy and the spectre of further big rate rises from major central banks have spooked investors.
“This feels like a make-or-break week. There is the residual anxiety of the repricing we went through last week and there is no sense at all that the sentiment is turning for something better,” said Samy Chaar, chief economist at Lombard Odier.
In currencies, the dollar rose around 0.1 per cent against a basket of other currencies, extending a powerful surge in recent months that had been fuelled by rising US interest rates.
“The currency market is probably summarising best how close we are to some kind of breaking point,” said Chaar. “The big question will be whether we will get some positive signal from central banks about when their hiking cycle will peak . . . You don’t see many paths through which the Fed could be reassuring.”
The consensus expectation on Wall Street is that the Fed will boost interest rates by 0.75 percentage points at the end of its two-day meeting on Wednesday. Market forecasts for a third consecutive rise of that magnitude were bolstered last week by data showing US consumer price inflation cooled less than expected in August.
Pricing based on federal funds futures suggests the Fed will lift its main interest rate to 4.4 per cent in the early months of 2023, from the current range of 2.25 per cent to 2.5 per cent, as policymakers attempt to cool inflation.
Fears are mounting among investors that the central bank’s efforts to subdue inflation with monetary tightening will pull the US economy into recession as debt servicing costs rise for companies and individual borrowers.
The yield on 10-year, inflation-linked US notes, which indicate the returns investors can expect to receive after accounting for inflation, reached a peak of 1.16 per cent, the highest since 2018. So-called real yields were around minus 1 per cent at the beginning of the year, flattering the valuations of fast-growing tech companies that make up a big weight on US stock indices.
The Japanese yen slipped 0.3 per cent to ¥143 against the dollar after last week reaching a 24-year low before the government stepped up its verbal intervention aimed at soothing the country’s currency market.
The Bank of Japan is set to make its latest policy decision on Thursday. Most economists expect the BoJ to stick with holding 10-year bond yields near zero as it attempts to stoke more durable inflation in an economy that has gone through decades of tepid price growth.
The Bank of England is also set to announce its decision on interest rates on Thursday, with the consensus forecast among City of London analysts pointing to a 0.5 percentage point rise.
Asian stocks also declined, with an MSCI gauge of shares in the region falling around 0.4 per cent. Equity markets in the UK and Japan were closed for public holidays.