US stocks recovered from earlier losses and government bond prices slipped, as the Federal Reserve remained cautious over the nascent economic recovery, despite predicting higher growth.
The yield on the benchmark 10-year Treasury note, which moves inversely to its price, gained as much as 0.07 percentage points to almost 1.69 per before the Fed’s policy announcement, dropping to 1.66 per cent afterwards.
Investors have been jittery over the Fed’s dismissal of a recent sell-off in US Treasury markets, due to expectations of markedly higher inflation as the economy reopens. While remaining cautious, the Fed indicated marginally more support for interest rate rises in 2023 and expectations of a sharp rebound in hiring by the end of this year.
Stocks on Wall Street — sensitive to the possibility of the Fed tightening monetary policy sooner to tackle rising inflation — retraced earlier losses. The blue-chip S&P 500, which had been 0.4 per cent lower earlier in the day, was 0.4 per cent higher by mid-afternoon.
Investors had expected the Fed to upgrade its growth forecasts to reflect a turbocharged recovery for the US economy from the coronavirus pandemic.
Borrowing costs have been rising all year, with the 10-year yield increasing from about 0.9 per cent at the start of this year, as markets anticipated a jump in inflation from President Joe Biden’s $1.9tn stimulus and the rollout of Covid-19 vaccines. Market measures of inflation expectations have also soared. The 10-year break-even rate, which is derived from US inflation-protected government securities, reached a seven-year high of 2.3 per cent this week.
The Fed has had a “communications challenge” around tapering stimulus, said Silvia Dall’Angelo, senior economist at Federated Hermes. That meant bond markets were likely to stay volatile, she added, because the Fed’s move to average inflation targeting, which allowed the central bank to be more tolerant of price increases overshooting, made it harder for investors to predict monetary policy.
“They have not stated exactly the extent of the overshoot they are comfortable with or for how long,” Dall’Angelo said. “From a market perspective this brings uncertainty and volatility.”
The bond sell-off in the US spread to other countries on Wednesday, taking the yield on the UK’s benchmark 10-year gilt up 0.05 percentage points to 0.83 per cent. The yield on the equivalent German Bund rose by the same margin to minus 0.29 per cent, while Canada’s 10-year yield climbed 0.04 percentage points to 1.61 per cent alongside rising yields in Australia, Brazil and Greece.
The sharp sell-off in longer-dated Treasuries pushed one portion of the US yield curve, which tracks the difference between two-year and 10-year government bond yields, to its highest point since September 2015, at 1.49 percentage points.
Lidia Treiber, director of fixed income research at WisdomTree Investments, said that even though the US was closer to an interest rate rise than economies that were recovering more slowly from coronavirus, it made sense for fears about tighter US monetary policy to spread around global bond markets.
“The US central bank is giving investors a window into the pace at which other central banks will eventually tighten,” she said, following heavy monetary stimulus from global rate-setters since the start of the pandemic.
In Europe, the Stoxx 600 benchmark closed down 0.5 per cent and London’s FTSE 100 dropped 0.6 per cent. The dollar, as measured against a basket of currencies, traded flat.
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2021-03-17 18:55:19Z
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