Government bond sell-off pauses ahead of Powell remarks

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 from Canada to Italy, the yield on the 10-year US government bond was broadly flat in early trading on Thursday at 1.47 per cent.

Germany’s 10-year bond yield fell 0.02 percentage points, as people bought the debt, to minus 0.3 per cent, while Italy’s slipped 0.01 percentage points to 0.74 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.

Stock markets were weak on Thursday as equity investors remained cautious about higher bond yields, which determine the discount rate used to value companies’ future cash flows. Europe’s Stoxx 600 equity index dropped 0.9 per cent, the UK’s FTSE 100 fell 1 per cent and Germany’s Xetra Dax lost 0.6 per cent, following a sell-off in the US overnight.

Hong Kong’s Hang Seng index closed 2.2 per cent lower, while mainland China’s CSI 300 dropped 3.2 per cent.

Futures markets signalled the US S&P 500 equity index would open 0.5 per cent lower and the top 100 stocks on the technology-focused Nasdaq Composite would fall 0.7 per cent.

Catherine Doyle, investment specialist at Newton Investment Management, said equity investors would probably continue to avoid shares in technology and other growth companies whose high valuations have been underpinned by low interest rates — and were a focus of Wednesday’s sell-off.

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 0.3 per cent. Brent crude, the international oil benchmark, fell 0.6 per cent to just under $64 a barrel as the Opec+ group of oil producers began their latest meeting.

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