US Treasuries sell off as traders look ahead to rate rises

Treasuries sold off on Tuesday, sending stock markets lower and exacerbating the ongoing decline in technology stocks, as traders look for higher interest rates.

The yield on US 10-year Treasuries, which is rising as the global government debt benchmark rate falls, reached a two-year high of 1.831 percent, as prospects for higher interest rates on cash deposits and persistent inflation made the security-interest payments steady. less attractive.

Meanwhile, the yield on the two-year Treasury, which closely follows interest rate expectations, rose 0.07 percentage point to 1.04 percent – a level not seen since February 2020.

“There is speculation about increasing aggressiveness on the part of the Federal Reserve,” said James Athey, portfolio manager at Aberdeen Standard Investments.

He said this mood “started” [JPMorgan chief executive] Jamie Dimon “suggested last week that they could lift six or seven times this year, and that move has gained momentum.”

The US central bank has pegged the key interest rate for its funds near zero since March 2020, but interest rate futures show that traders expect the rate to exceed 1 percent by December.

The pan-European stock index Stoxx 600 was down 1.4 per cent, shedding 2.6 per cent by the technology sub-index shares, with London’s FTSE 100 down 1 per cent.

Futures betting on the direction of the Nasdaq 100 index on Wall Street, which is stacked with technology and other high-value growth companies sensitive to expectations of tighter monetary policy, fell 2 percent. Those tracking the broader S&P 500 index fell 1.4 percent.

Equity investors are also struggling with slowing corporate earnings growth after recovering in 2021 from the economic shocks caused by the coronavirus the previous year.

Meanwhile, analysts surveyed by data provider FactSet expect S&P-traded companies to post an overall profit growth of 22 percent in the fourth quarter, year-over-year, compared to 40 percent in the previous three-month period.

The German 10-year bond yield, a benchmark for European corporate and household borrowing costs, traded at 0.01 percent on Tuesday as it remained close to climbing above zero for the first time since 2019.

Stock markets initially rose after data last week showed US inflation hit an annual rate of 7 percent in December, but it was also moderate on a monthly basis.

But new fears of prolonged price hikes due to supply chain bottlenecks emerged after the authorities in China, a major exporter of goods, reacted to the spread of the coronavirus variant from Omicron with new closures and travel controls.

“This is now starting to cause some concern about the supply chain crisis,” said Randeep Sommel, portfolio manager at M&G. “It can only go the other way at this point, a lot of Western economies are going to completely stifle it and reopen everything again.”

In Asia, Hong Kong’s Hang Seng fell 0.4 percent and the Nikkei in Tokyo closed 0.3 percent lower. The yen traded near a five-year low against the dollar after the Bank of Japan opted to keep its key interest rate negative.

Brent crude, the oil standard, rose 1.2 percent to $87.52 a barrel – hitting a new seven-year high on Tuesday.

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