US government debt under pressure as traders await Fed minutes


A US government debt downturn deepened on Wednesday after a top Federal Reserve official signalled a rapid reversal of the central bank’s pandemic-era support for financial markets.

The yield on the benchmark 10-year US Treasury note, which moves inversely to its price and underpins borrowing costs worldwide, added 0.05 percentage points to 2.61 per cent, a level not seen since early 2019.

The two-year Treasury yield, which tracks interest rate expectations, rose 0.07 percentage points to 2.57 per cent, with the two yields remaining close after this part of the so-called yield curve inverted last month for the first time since 2019 in what economists viewed as an indication of recession.

In stock markets, the regional Stoxx Europe 600 share index opened 0.1 per cent lower and London’s FTSE 100 lost 0.2 per cent, with deeper drops across Asian bourses after data signalled China’s service sector had been hit hard by coronavirus lockdowns.

Fed governor Lael Brainard on Tuesday said a “rapid” reduction of the US central bank’s balance sheet could start in May. The balance sheet had swelled to $9tn since the Fed announced unlimited bond purchases in March 2020 to help suppress borrowing costs for businesses and households during the coronavirus crisis.

With US consumer price inflation running at a 40-year high and potential further sanctions on Russian energy resources threatening to cause further spikes, analysts also expect the Fed to aggressively raise interest rates this year. Minutes from the Fed’s March policy meeting, to be released on Wednesday, are expected to offer clues as to how swiftly this process will occur.

“Higher inflation will require a more aggressive tightening in monetary policy from central banks, and we now see the Fed moving much faster, with 50 [basis point] hikes at the next 3 meetings, and a terminal [interest] rate of 3.6 per cent by mid-2023,” Deutsche Bank strategists said in a note to clients.

Equity markets have been less vulnerable to inflation and Russia’s invasion of Ukraine, as a key measure of the gap between returns on stocks and bonds has remained favourable. The real yield on the 10-year Treasury — the return investors earn after inflation — is below zero, making stocks’ dividend payments relatively attractive.

“With cash/bonds still offering negative real yields, investors have been inclined to buy the dips in global equities,” Citi strategists led by Robert Buckland said in a research note.

The Stoxx is trading above its level of February 23, the eve of President Vladimir Putin’s invasion of Ukraine. Wall Street’s benchmark S&P 500 index is about 7 per cent higher.

In Asia, Hong Kong’s Hang Seng index dropped 1.2 per cent and China’s CSI 300 lost 0.3 per cent as both bourses reopened after a holiday. Japan’s Nikkei 225 fell 1.6 per cent.

China’s service sector suffered its worst contraction last month since February 2020 at the outset of the coronavirus pandemic, according to a private sector survey.

The Caixin services purchasing managers’ index, which asks companies in the sector whether they experienced an increase or decrease in business activity compared with the previous month, came in at 42.0 on Wednesday, well below the 50-point threshold that separates contraction from expansion.

China is battling its worst outbreak of coronavirus since the pandemic began, with strict lockdowns in multiple cities including the commercial centre Shanghai.


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