The sale of the treasury was restarted on Tuesday when investors increased their bets on monetary tightening by the Federal Reserve, with markets fully setting prices for the first time in four interest rate increases from the US Federal Reserve this year.
Treasury bond yields jumped to a two-year high as traders returned from a long weekend in the U.S., pulling stock markets. The reference S&P index fell to its lowest level since mid-December, while the technologically difficult Nasdaq reached its lowest point since October.
Yields on ten-year U.S. Treasury bonds, rising as global sovereign debt declines, rose as high as 1.86 percent as the prospect of higher rates on cash deposits and sustained inflation led to less attractive fixed-income securities repayments. It rose 0.06 percentage points to 1.84 percent by mid-afternoon in New York.
Meanwhile, the yield on two-year treasury bills, which closely follows interest rate expectations, rose to a 1.06 percent high – a level not seen since February 2020 – and traded 0.06 percentage points to 1.03 percent.
Nasdaq, which is packed with technology groups and other highly regarded companies in growth sensitive to rising interest rates, fell 2.1 percent. The broader S&P 500 fell 1.6 percent. Rising interest rates can quickly affect the assessment of capital when the Fed is expected to change the rate of borrowing costs quickly.
“There is speculation about the Fed’s growing aggression,” said James Athey, portfolio manager at Aberdeen Standard Investments.
This mood, he said, was “encouraged” by JPMorgan Chase CEO Jamie Dimon “carelessly suggesting last week that [policymakers] could hike six or seven times this year, and the move has gained momentum. “
The Fed has tied its main interest rate close to zero since March 2020, but futures contracts on the interest rate show that traders expect it to exceed 1 percent by December.
In stock markets, investors have also struggled with a slowdown in corporate revenue growth following last year’s recovery from 2020 shocks.
Analysts surveyed by data provider FactSet expect the companies listed on the S&P 500 to report total profit growth of 22 percent in the last quarter of 2021, compared to 40 percent in the previous quarter.
Goldman Sachs shares fell 7 percent on Tuesday, on the way to the biggest daily decline since June 2020, after the quarterly earnings of the investment bank failed analysts’ forecasts.
Stock market initially increased after data last week showed U.S. inflation reached an annual rate of 7 percent in December, although it also declined from month to month.
But new fears of a prolonged rise in prices caused by bottlenecks in the supply chain emerged after authorities in China, a major exporter of goods, reacted to the spread of the coronavirus variant Omicron with new blockade and travel controls.
“This is now beginning to raise concerns about supply chain breaches,” said Randep Somel, portfolio manager at M&G.
The Bank of Japan reversed its inflation projections on Tuesday, adding a boost to yield growth. Typically the sweetest of the world’s largest central banks, BoJ said the risks to his forecast are now “balanced” rather than “skewed down”, a phrase he has used since 2014.
The change in language “allows markets to imagine a world in which the BoJ is taking its foot off the accelerator of monetary easing,” said Padhraic Garvey, an ING analyst.
In Europe, the Stoxx 600 regional stock index fell 1 percent as its technology sub-index fell 2.2 percent.
The German Bund’s 10-year yield, a benchmark for European companies and household borrowing costs, traded down minus 0.02 percent on Tuesday, as it remained close climbing above zero for the first time since 2019.
In Asia, the Hong Kong stock index in Hang Seng fell 0.4 percent and Nikkei in Tokyo by 0.3 percent.
Brent crude rose to $ 88.13 a barrel on Tuesday – highest level since 2014 – although he later gave up on that move.
The dollar index, which measures the U.S. currency against six others, rose 0.5 percent.