Short-term US government bonds drop as traders bet on rate rises
A downturn in short-term US government debt intensified on Friday, putting two-year Treasuries on track for their worst week since October 2019 as traders sold the notes in anticipation of the Federal Reserve raising interest rates.
The yield on the two-year Treasury note, which is sensitive to interest rate expectations that affect the relative value of bonds’ fixed income payments, rose 0.04 percentage points to 0.54 per cent.
This yield sat at around 0.43 per cent a week ago before rising by its most since the market tumult of March 2020 on Wednesday, after data showed the annual rate of US consumer price inflation hit an unexpectedly high 6.2 per cent in October.
US inflation had run at 5 per cent or more since May, as prices were pushed higher by coronavirus-related supply chain disruptions. But investors have been unsettled by signs of inflation broadening across a number of sectors, potentially weakening support for the Fed’s view of the situation as “transitory”.
Government debt markets had also whipsawed in recent weeks as traders struggled to make accurate bets about how central banks would normalise monetary policies that had become ultra-supportive during the Covid-19 era.
The Bank of England, after sending hawkish signals about inflation for weeks, then held back from raising interest rates from a record low at its last meeting.
Australia’s central bank last month declined to defend a key bond-yield target as it jumped higher, unleashing a broader sell-off across the nation’s sovereign debt market. The bank days later dropped its yield curve control policy that had lowered borrowing cost through the pandemic.
“Globally, the behaviour of central bankers is becoming more erratic,” said Valentijn van Nieuwenhuijzen, chief investment officer at Dutch asset manager NN Investment Partners. “This creates discomfort in markets, the question of whether central bankers are confused.”
In equities, the regional Stoxx Europe 600 traded flat at close to a record high after a strong rally in recent weeks, driven by better than expected corporate earnings.
“We and many other investors were sceptical about whether companies could pass rising costs through to customers,” said Juliette Cohen, strategist at CPR Asset Management. “But, in fact, they did.”
Almost six in 10 Stoxx-listed businesses that have reported third-quarter earnings so far have beaten analysts’ expectations, according to calculations by strategists at Bank of America.
Futures contracts tracking Wall Street’s S&P 500 share index also flatlined, while those on the technology-focused Nasdaq 100 gained 0.2 per cent.
While stock markets were shaken by bond market volatility at the start of 2021, the fact the downturn in US government debt was confined to shorter-duration bonds was providing comfort for equity investors, van Nieuwenhuijzen said.
The yield on the 10-year Treasury, which investors use as a risk-free benchmark to value equities, ticked 0.01 percentage points higher to 1.572 per cent on Friday but has traded in a steady range for the past month.
This marks a contrast with the first quarter of the year, when longer-dated US debt endured its worst performance since the 1980s as markets positioned for a much longer cycle of inflation and interest rate rises than is currently priced in.
Other market moves:
Japan’s Nikkei 225 closed 1.1 per cent higher and Hong Kong’s Hang Seng index gained 0.3 per cent.
The dollar was steady at around a 16-month high against the euro, with one unit of the common currency buying $1.14.
Brent crude, the oil benchmark, dropped 1.5 per cent to $81.61 a barrel.