A global sell-off in government bonds paused on Thursday as investors awaited remarks by Federal Reserve chairman Jay Powell that could signal how the central bank will react to ructions in the sovereign debt markets.
Following a fresh bout of selling in US Treasuries on Wednesday, which spread to debt issued by other nations spanning Canada to Italy, the yield on the 10-year US government bond was broadly flat on Thursday morning in New York at 1.47 per cent.
Germany’s 10-year bond yield fell 0.02 percentage points, as people bought the debt, to minus 0.32 per cent, while Italy’s slipped 0.02 percentage points to 0.73 per cent.
The yield on the 10-year Treasury, which acts as a benchmark for borrowing costs and asset prices worldwide, has risen rapidly from about 0.9 per cent at the start of the year.
Investors have offloaded the debt as President Joe Biden pushes his $1.9tn coronavirus relief package through the US legislature, raising expectations that the heavy stimulus spending will create strong economic growth and feed inflation.
The Fed continues to buy at least $120bn of financial assets each month to add liquidity to financial markets, as part of its emergency response to the pandemic that has helped drive global stock markets to a series of record highs.
Powell, who speaks at a Wall Street Journal summit at around 5pm UK time, is under growing pressure to respond to the bond sell-off. But economists at Morgan Stanley said he was unlikely to discuss using measures that would “combat an undesired tightening of financial conditions”.
“Policymakers will probably continue to hold the view that the rise in longer-term rates is commensurate with an improving economic outlook,” they added.
Wall Street stock markets weakened on Thursday as equity investors remained cautious about volatility in bond yields, which determine the discount rate used to value companies’ future cash flows. The S&P 500 fell more than 1 per cent and the technology-focused Nasdaq Composite slid by around the same margin.
In Europe, the Stoxx 600 equity index dropped 0.2 per cent and the UK’s FTSE 100 fell 0.4 per cent.
Catherine Doyle, investment specialist at Newton Investment Management, said equity investors would probably remain cautious about shares in technology and other growth companies whose high valuations have been underpinned by low interest rates — and were sold off heavily on Wednesday.
Doyle said she expected companies whose fortunes were linked to an economic recovery, such as banks and oil producers, to continue to do well. “For an equity investor, the main themes are reflation and economies reopening,” she said.
The dollar, as measured against a basket of currencies, strengthened 0.2 per cent, taking the greenback’s rise during the past five days to more than 1 per cent.
Industrial metals have been falling as the dollar strengthens and investors rush to bank profits made in the recent run-up in commodity prices.
Nickel, which declined as much as 7.5 per cent to below $16,000 a tonne before recovering, took the brunt of the selling. The trigger was news that Chinese stainless steel giant Tsingshan Holding Group is able to adjust its production to make high-grade nickel for electric vehicles. Furthermore, there were rumours that a cash-strapped steel company with a trading arm had dumped 7,000 tonnes of the metal, according to traders.
Elsewhere, copper traded down to $8,645 a tonne as rising US Treasury yields sapped risk appetite. It later rallied to $8,890, while aluminium was down 2.4 per cent at $2,161 a tonne.
“[The] price action over the past months has little to do with a supercycle, but is rather associated to a cyclical overshoot in demand, along with a rise in supply risk tied to the global container squeeze and finally to a massive increase in speculation tied to reflation bets,” said Bart Melek, head of commodity strategy at TD Securities.
Brent crude, the international oil benchmark, gained 1.7 per cent to just under $64 a barrel after Saudi Arabia cautioned over raising output at an ongoing Opec+ meeting.