Government bonds under pressure over rate rise concerns

US and European stocks were subdued on Monday, while government bonds came under renewed pressure, as investors fretted over the impact of aggressive interest rate rises on the global economy.

Wall Street’s broad S&P 500 traded flat after the New York opening bell. The technology-heavy Nasdaq Composite added 0.5 per cent. In Europe, the regional Stoxx 600 gauge was steady, having trimmed earlier losses.

The moves came after global equities closed out a second straight week of declines, knocked lower by concerns over monetary policy tightening and a gloomy economic outlook. The Stoxx ended Friday’s session in “bear market” territory — typically defined as a decline of 20 per cent or more from a recent peak.

Fears have intensified in recent months that central banks will jack up borrowing costs to such an extent that they compound an economic slowdown, as they fight against persistently high inflation.

Last week, the US Federal Reserve led the charge on a series of interest rate rises by other global peers, implementing a third consecutive increase of 0.75 percentage points to a target range of 3 to 3.25 per cent.

“Markets picked up today where they left off on Friday as Monday morning started on a ‘risk off’ footing, with yields making fresh highs around the world without much relief in sight,” said analysts at Citigroup.

“We expect the king dollar sentiment to continue until we see a follow-through in US unemployment numbers and a ‘Fed pivot’, but we might still be far away from that point,” they added.

The yield on the 10-year US Treasury note added 0.07 percentage points to 3.77 per cent on Monday, as the price of the benchmark debt instrument fell.

The UK’s 10-year gilt yield surged 0.25 percentage points to 4.08 per cent, extending historic moves from Friday’s session, as traders reacted to the government’s package of tax cuts designed to boost the economy. The two-year gilt yield, which is more sensitive to changes in interest rate expectations, jumped more than 0.4 percentage points to 4.42 per cent.

In currencies, the pound slid to an all-time low of $1.035 against the dollar in early Asian trading hours, later stabilising at $1.085. The greenback, which tends to strengthen in times of economic and market stress, added 0.1 per cent against a basket of six peers, hitting a fresh 20-year high.

European corporate bond markets also reflected concerns about the effect of rapidly rising interest rates. Borrowing costs for high-yield European issuers hit the highest level since the start of the coronavirus pandemic in March 2020 at 7.5 per cent, according to the ICE BofA Euro High Yield index.

In Italy, a coalition of rightwing parties won the country’s election, led by Giorgia Meloni’s ultra-conservative Brothers of Italy party. The results were widely expected and the parties must now form a government, which typically takes a month. The 10-year Italian yield added 0.12 percentage points to 4.49 per cent on Monday.

Ludovico Sapio, macro research associate at Barclays, said that in the short term, “risks of tensions are modest” but in the medium term “a centre-right government would bring a looser fiscal stance and a higher risk of frictions with the EU”.

Read More: Government bonds under pressure over rate rise concerns

2022-09-26 07:20:12

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