The yield on the US 10-year Treasury note touched 3 per cent for the first time in more than three years on Monday, as traders prepared for the Federal Reserve to raise interest rates again at a time of soaring inflation and slowing growth.
The yield on the government bond has profound effects on the economy, feeding into home mortgage rates and borrowing costs for companies. The higher yield, which rises when bond prices fall, is tightening financial conditions after two years of the coronavirus pandemic.
The US 10-year yield edged just above 3 per cent in early afternoon trading in New York, according to Bloomberg data — double its level at the start of the year and the highest since December 2018. It later dipped back to 2.99 per cent, up 0.05 percentage points on the day.
Yields have risen this year as the Fed takes action to try to stem US inflation, which hit 8.5 per cent on an annual basis in March — its fastest rate of increase in 40 years.
The combination of high inflation and a weakening global economic outlook — the US economy shrank 1.4 per cent year on year in the first quarter — has raised questions about how far the Fed will be able to lift interest rates without overburdening the economy.
Alex Roever, US rates strategist at JPMorgan, said the Fed was facing a “thick stew of uncertainties”, including rising labour costs, supply-chain problems and commodity prices that have leapt since Russia’s invasion of Ukraine.
“While it’s clear that this economy doesn’t need stimulative monetary policy, what is less clear is the speed at which this stimulus should be removed, and the reasons for choosing that speed,” he added.
The Fed is widely expected to announce an extra-large interest rate rise of half a percentage point at the end of its May policy meeting on Wednesday, and futures markets are pricing in similar half-point rises at the next two meetings.
Short-term US interest rates are now expected to be close to 2.5 per cent by the end of 2022, up from the current range of 0.25 to 0.5 per cent.
As investors brace for higher interest rates, there are signs of pressure in national economies. Surveys of industry executives released at the weekend showed activity in China’s sprawling factory sector contracted last month at the fastest pace since February 2020 as the country’s economy reels from coronavirus lockdowns.
At the same time, purchasing managers’ indices released on Monday pointed to slowing activity growth in the eurozone and US factory sectors.
The rapid increase in bond yields this year has weighed on stock markets by reducing the appeal of riskier investments, and the combination of higher rates and gloomy economic data hit shares earlier in the day.
However, US equities indices closed higher as traders took advantage of the recent slides to “buy the dip”. The tech-dominated Nasdaq Composite, which in April suffered its worst monthly drop since the global financial crisis in 2008, rose 1.6 per cent. The broader S&P 500 index closed 0.6 per cent higher, having dropped as much as 1.7 per cent earlier in the afternoon.
Meanwhile, in Europe, the regional Stoxx 600 index slid as much as 3 per cent before trimming its losses to trade 1.5 per cent lower.
The initial fall for the regional gauge reflected brief — but steep — drops for Nordic gauges including Sweden’s benchmark OMX 30, which tumbled as much as 7.9 per cent before recovering to close 1.9 per cent lower.
One trader attributed the move to Citigroup bungling a trade of a basket of shares that included many Swedish names. Citi declined to comment.
Rising Treasury bond yields helped the dollar index, which measures the US currency against a basket of six others, gain 0.7 per cent to a fresh 20-year high.