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US Treasuries under pressure as traders await Fed minutes

A decline in US government debt deepened on Wednesday after a senior Federal Reserve official signaled a swift reversal in central bank support for financial markets during the pandemic era.

The yield on the benchmark 10-year US Treasury bond, which moves inversely to its price and underpins borrowing costs globally, rose 0.05 percentage point to 2.61 percent, a level not seen since early 2019.

The two-year Treasury yield, which tracks interest rate expectations, rose 0.07 percentage point to 2.57 percent, 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 took to indicate a recession.

In equity markets, the regional Stoxx Europe 600 stock index opened 0.1 percent lower and London’s FTSE 100 slipped 0.2 percent, with deeper falls on Asian bourses after data suggested China’s services sector had been hit hard by coronavirus lockdowns .

Fed Governor Lael Brainard on Tuesday called a “rapid” reduction in the US Federal Reserve’s balance sheet could begin in May. The balance sheet had grown to $9 trillion since the Fed’s announcement unlimited bond purchases in March 2020 to reduce borrowing costs for businesses and households during the coronavirus crisis.

As US consumer price inflation is at a 40-year high and potential further sanctions on Russian energy resources threaten to cause further spikes, analysts too expect the Fed to raise interest rates aggressively this year. Minutes of the Fed’s March monetary policy meeting, to be released on Wednesday, are expected to provide some indication of how quickly this process will happen.

“Higher inflation will require more aggressive monetary tightening from central banks and we are now seeing the Fed moving much faster at 50 [basis point] Hikes at the next 3 meetings and a terminal [interest] Interest rate of 3.6 percent by mid-2023,” Deutsche Bank strategists said in a customer statement.

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

“With cash/bonds still offering negative real returns, investors are biased to buy the declines in global equities,” Citi strategists led by Robert Buckland said in a research note.

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

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

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

The Caixin Services Purchasing Managers’ Index, which asks companies in the sector whether they saw a rise or fall in business activity from the previous month, came in at 42.0 on Wednesday, well below the 50-point line separating contraction from expansion .

China is battling the worst coronavirus outbreak since the pandemic began, with strict lockdowns in several cities, including the commercial hub shanghai.

https://www.ft.com/content/36c49310-6eb6-44c5-9c4d-b8b455124086 US Treasuries under pressure as traders await Fed minutes

Adam Bradshaw

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