Shorter-dated US government bonds whipsawed on Monday in choppy trading driven by expectations the Federal Reserve will aggressively tighten monetary policy in an attempt to rein in inflation.
The yield on the two-year Treasury note, which moves inversely to its price, rose as much as 0.11 percentage points in European trading to top 2.4 per cent, up more than 1.6 percentage points since the end of last year. The rise in yield eased to 0.02 percentage points on the day in early New York dealings, contrasting a decline in yields on long-dated Treasuries.
Short-term bonds have sold off more vigorously this year than those at the longer end of the spectrum as expectations for a series of Fed rate rises in the coming months weigh on longer-term economic growth forecasts.
“The market is pricing a significant overshoot in inflation and central banks being forced to react strongly, triggering an economic slowdown,” said Luca Paolini, chief strategist at Pictet Asset Management.
The five-year Treasury yield on Monday rose above the 30-year yield for the first time since 2006, before falling back to a fraction below the longer-dated security.
A so-called yield-curve inversion of this nature reflects concerns that the Fed’s attempt to battle inflation could over time depress growth or even cause a recession.
The rise in Treasury yields on Monday may have moderated because of a drop in oil prices as Ukraine and Russia prepare for more peace talks and coronavirus lockdowns in China potentially easing global energy demand, said Christian Keller, head of economics research at Barclays. High energy prices have been a key component of elevated global inflation.
Brent crude oil fell 6 per cent to $113.39 a barrel, still 17 per cent above its closing level of February 23, on the eve of Russia’s invasion.
Still, “the Fed has given a clear signal it wants interest rates to move higher”, Keller said. “I’d be careful to over-interpret what is happening hour to hour, particularly as we are at the end of a quarter”, he said, when traders are motivated to cash in on profitable bets.
Consumer price inflation in the US hit a 40-year high of 7.9 per cent in February, with analysts expecting the surge to continue as price disruptions caused by industries reopening from coronavirus lockdowns are exacerbated by the Ukraine war.
Citigroup analysts said last week the Fed would likely raise borrowing costs by half a percentage point at every monetary policy meeting from May to September. Goldman Sachs on Friday forecast the 10-year Treasury yield, which stood at just under 2.5 per cent on Monday, to hit 2.7 per cent by the end of the year.
Volatility in the US Treasury market also spread to eurozone bonds. Germany’s five-year bond yield rose as much as 0.1 percentage point to 0.429 per cent, the highest level since 2014.
In equities, Wall Street’s S&P 500 share index opened 0.2 per cent lower. The tech-focused Nasdaq Composite rose 0.3 per cent.
Europe’s Stoxx 600 share index rose 0.7 per cent as investors cautiously welcomed a pledge by Ukrainian president Volodymyr Zelensky to declare neutrality and abandon a plan to join Nato if Russia withdrew its troops. An index of European bank stocks rose 2.4 per cent.
Asian bourses were mixed, with Japan’s Nikkei 225 closing 0.7 per cent lower and Hong Kong’s Hang Seng adding 1.3 per cent.
The dollar rose 1.7 per cent against the Japanese yen to purchase ¥124.2, the most since 2015 as the Bank of Japan took steps to maintain loose monetary policy while the Fed raises interest rates.