US government debt sell-off worsens as banks predict swift Fed rate rises

Wall Street and European equities were on track to end the week higher, although analysts questioned the sustainability of a rally that has wiped out the benchmarks’ losses from the start of Russia’s invasion of Ukraine.

Wall Street’s S&P 500 index, which closed Thursday’s session about a tenth above its February 24 wartime low, traded flat in early New York dealings but was on course to rise more than 1.3 per cent for the week. The tech-heavy Nasdaq Composite edged 0.3 per cent lower on Friday.

Europe’s Stoxx 600 share index, which has risen above its level of February 23, the day before President Vladimir Putin launched the offensive against Russia’s neighbour, added 0.5 per cent.

The moves came after US president Joe Biden urged the west to sustain pressure on Putin, including with tighter sanctions on Russia, which is the world’s second-largest producer of crude oil as well as a leading exporter of industrial metals.

Germany then said it would wean itself off Russian gas by mid-2024 as the US pledged to supply additional liquefied natural gas to the EU, although energy markets did not react strongly. Contracts linked to the TTF European wholesale gas price lost 1.8 per cent to €105 a megawatt-hour, remaining more than five times higher than their level of a year ago. Brent crude fell 2.8 per cent to $116 a barrel.

The inflationary effects of the Ukraine war, which has driven Brent almost a fifth higher since February 23, have combined with the US Federal Reserve signalling interest rate rises to make investors “very bearish”, said Barclays strategists.

“Stocks have indeed recovered their losses since the war started, but the conflict remains unresolved, inflation is surging, central banks are even more hawkish,” the Barclays team, led by Emmanuel Cau, head of European equity strategy, said in a note to clients.

The “bounce in equities”, Barclays added, could be attributed to low trading volumes as large money managers stayed cautious, and shorter-term investors bet on stocks falling at the start of the war and then bought them back at lower prices, in so-called “short-covering” moves.

Global equities might “go higher in the very short term”, said Giuliano Gasparet, head of equities at Generali Insurance Asset Management. But the recent recovery was driven by short-covering, as well as systematic traders buying in a mechanical reaction to a drop in stock market volatility after it spiked earlier this month, he said.

“Longer term, I’m much more pessimistic” he added. “We are not chasing this market.”

US government bonds are also on track for their worst month since 2016, with the fixed-income paying securities becoming less attractive owing to the prospect of higher interest rates and inflation. Money markets imply the Fed will increase its main funds rate to almost 2.3 per cent by December.

The yield on the 10-year US Treasury note rose on Friday as much as 0.13 percentage points to 2.475 per cent, the highest level since May 2019, as the benchmark debt security fell in price. Goldman Sachs expects this yield, which underpins the costs of corporate debt and consumer borrowing worldwide, to hit 2.7 per cent by the end of 2022.

In Asia, Hong Kong’s Hang Seng share index dropped 2.5 per cent, China’s CSI 300 fell 1.8 per cent. Tokyo’s Nikkei closed 0.1 per cent higher, having risen almost 12 per cent in the past fortnight, supported by the weak yen.


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