The yield on short-term US government bonds rose on Wednesday to the highest level since March 2020, as more indications of rising inflation stubbornly prompted investors to bet on global interest rate increases.
The latest sell-off in the short-term part of the bond market, which is particularly sensitive to monetary policy expectations, came after data showed a measure of Australian core inflation rose to an annual rate of 2.1 per cent in the July-September quarter, pushing in the central bank’s target range. For the first time since 2015.
Markets are betting that the Reserve Bank of Australia will raise interest rates from current record lows as soon as next summer, despite the central bank’s repeated insistence that borrowing costs will not need to rise until 2024. Three-year bond yields rose to 0.95 in cent on Wednesday, up from 0.76 percent the day before.
“As revenue continues to rise, [the RBA] They will likely be forced to keep working,” said Commerzbank analyst, Antje Prevk. “The market is increasingly likely to assume that the RBA will have to rethink its expansionary monetary policy further due to economic and inflationary developments.”
The sell-off in US government bonds, a major global benchmark, bled into a continuation of a recent trend driven by expectations that monetary policy makers will have to raise interest rates to deal with higher price growth. Long-term debt has been shielded from the worst selling off, as some investors are betting that monetary tightening will slow economic growth in the coming years.
Two-year Treasury yields were below 0.5 percent on Wednesday, as inflationary pressures added to hot anticipation of next week’s Federal Reserve meeting. The central bank has already indicated that it may soon begin scaling back its $120 billion per month pandemic-era bond-buying program.
The European Central Bank meets on Thursday of this week, with an interest rate decision from the Reserve Bank of Australia next Tuesday, the Federal Reserve next Wednesday, and the Bank of England the following day.
“So far, we’ve seen a similar trend in the different yield curves,” said Cosimo Marasciulo, head of absolute return on investment at Amundi. “But different central banks may have different approaches,” which “may lead to less synchronized monetary policy when you look at 2022.”
In the stock markets, European shares drifted lower in morning trade as investors pondered a string of earnings reports delivered across the Atlantic, hundreds more due in the next two weeks. The Stoxx 600 was down 0.3 per cent while London’s FTSE 100 was down 0.2 per cent, ahead of the lunchtime UK budget announcement as Chancellor Rishi Sunak will determine the state of the country’s public finances and upcoming spending plans.
The moves were followed by a decline in Asian stocks, with Hong Kong’s Hang Seng Index closing 1.6 percent lower.
The US benchmark S&P 500 index touched a new record on Tuesday, closing up 0.2 percent. The S&P is up 22 percent since early January — helped on Tuesday by strong results from UPS and General Electric. After the closing bell, numbers from Google subsidiary Alphabet and fellow tech giant beat analysts’ expectations.
Futures markets indicated on Wednesday that the Standard & Poor’s Index will open 0.1 percent higher, while the technology-focused Nasdaq 100 will also rise 0.1 percent.
What to watch in the markets today
United kingdom: Chancellor Rishi Sunak will reveal his annual speech on budget and expenditure review. Government officials have already confirmed the national minimum wage hike, and Sunak is expected to announce an end to the “wage halt” in the public sector. The UK’s Office of Budget Responsibility will also publish its economic and financial outlook and the Bank of England will release capital issuance statistics.