U.S. Treasury yields hit their highest levels in more than a decade on Monday as investors braced for a third consecutive jumbo rate hike of 0.75 percentage points by the Federal Reserve on Wednesday.
The yield on 10-year US Treasuries, a benchmark for global borrowing costs, pushed above 3.5 percent for the first time since April 2011 when investors sold the bonds. The interest rate on the two-year government bond rose to a 15-year high of 3.94 percent. While the two-year rate tracks interest rate expectations particularly closely, the entire spectrum of interest rates has shot higher as expectations of a longer period of high borrowing costs have set in.
On Wall Street, the broad S&P 500 closed 0.69 percent higher while the technology-heavy Nasdaq Composite rose 0.76 percent on Friday. Europe’s region-wide Stoxx 600 fell 0.1 percent.
The subdued performance on Monday comes after MSCI’s broad index of developed and emerging market shares fell 4 percent last week in its biggest weekly drop since June. Concerns about the health of the global economy and the specter of further big interest rate hikes by major central banks have spooked investors.
“This feels like a make-or-break week. It’s the residual anxiety about the price reduction we went through last week, and it makes no sense at all that the sentiment is turning towards something better, says Samy Chaar, chief economist at Lombard Odier.
In currencies, the dollar rose about 0.1 percent against a basket of other currencies, extending a sharp rally in recent months that had been fueled by rising U.S. interest rates.
“The currency market probably best sums up how close we are to some sort of tipping point,” Chaar said. “The big question will be whether we will get a positive signal from the central banks about when their hiking cycle will peak. . . You don’t see many avenues through which the Fed can be reassuring.”
The consensus expectation on Wall Street is that the Fed will raise interest rates by 0.75 percentage points at the end of its two-day meeting on Wednesday. Market forecasts for a third consecutive increase of that magnitude were bolstered last week by data showing that US consumer price inflation cooled less than expected in August.
Prices based on federal funds futures suggest the Fed will raise its key rate to 4.4 percent in the first months of 2023, from the current range of 2.25 percent to 2.5 percent, as policymakers try to cool inflation.
Fears are growing among investors that the central bank’s efforts to curb inflation with monetary tightening will drag the US economy into recession as debt servicing costs rise for companies and individual borrowers.
The yield on 10-year, inflation-linked US notes, which indicates the return investors can expect to get after taking inflation into account, reached a peak of 1.16 percent, the highest since 2018. So-called real interest rates were around minus 1 per cents at the start of the year, flattering the valuations of fast-growing technology companies that make up a heavy weight in US stock indexes.
The Japanese yen fell 0.3 percent to 143 yen against the dollar after it hit a 24-year low last week before the government stepped up its verbal intervention aimed at calming the country’s currency market.
The Bank of Japan is due to make its final policy decision on Thursday. Most economists expect the BoJ to stick with keeping 10-year bond yields close to zero as it tries to stimulate more sustained inflation in an economy that has endured decades of tepid price growth.
The Bank of England is also set to announce its decision on interest rates on Thursday, with the consensus forecast among City of London analysts pointing to a rise of 0.5 percentage point.
Asian stocks also fell, with an MSCI gauge of shares in the region falling around 0.4 percent. Stock markets in the UK and Japan were closed for public holidays.