Short-dated US bond yields rise as central bank meetings draw near

The yield on short-dated US government bonds rose on Wednesday to the highest level since March 2020, as further signs of stubbornly high inflation drove investors to bet on global rate increases.

The latest wave of selling in the shorter term portion of the bond market, which is particularly sensitive to monetary policy expectations, came after data showed a core Australian inflation measure rose to an annual rate of 2.1 per cent in the July to September quarter, pushing it into the central bank’s target range for the first time since 2015.

Markets are betting that the Reserve Bank of Australia will raise rates from the current record lows as soon as next summer, despite the central bank’s repeated insistence that borrowing costs will not need to rise until 2024. Three-year bond yields rose as high as 0.95 per cent on Wednesday, up from 0.76 per cent a day earlier.

“As yields continue to rise, [the RBA] will probably be forced into continued action,” said Commerzbank analyst Antje Praefcke. “The market is likely to increasingly assume that the RBA will have to rethink its expansionary monetary policy further due to economic and inflationary developments.”

The selling bled into US government bonds, a key global benchmark, in a continuation of a recent trend driven by expectations that monetary policymakers will be forced to raise rates to deal with more elevated price growth. Longer term debt has been shielded from the worst selling, with some investors betting a tightening of monetary policy will slow down economic growth in the years to come.

Two-year Treasury note yields were a whisker below 0.5 per cent on Wednesday, as inflationary pressures added to hot anticipation of the Federal Reserve’s meeting next week. The central bank has already signalled it could imminently begin to taper its $120bn-a-month pandemic-era bond-buying programme.

The European Central Bank will meet on Thursday this week, with the RBA’s interest rate decision due next Tuesday, the Fed next Wednesday and the Bank of England a day later.

“Until now, we’ve seen a similar trend in the different yield curves,” said Cosimo Marasciulo, head of investment absolute returns at Amundi. “But it might be that different central banks have different approaches”, which “might lead to less synchronised monetary policy when you look at 2022”.

In equity markets, European stocks drifted lower in morning trading as investors contemplated a flurry of earnings reports delivered across the Atlantic, with hundreds more due in the next two weeks. The Stoxx 600 dipped 0.3 per cent while London’s FTSE 100 fell 0.2 per cent, ahead of the UK’s Budget announcement at lunchtime when chancellor Rishi Sunak will outline the state of the country’s public finances and upcoming spending plans.

The moves followed on from drops in Asian shares, with Hong Kong’s Hang Seng index closing down 1.6 per cent.

The US’s blue-chip S&P 500 index touched another record high on Tuesday, closing up about 0.2 per cent. The S&P has climbed 22 per cent since early January — helped on Tuesday by strong results from UPS and General Electric. After the closing bell, numbers from Google parent Alphabet and fellow tech giant Microsoft topped analysts’ expectations.

Futures markets on Wednesday signalled that the S&P would open 0.1 per cent higher, while the technology-focused Nasdaq 100 index would also rise 0.1 per cent.

What to watch in markets today

UK: chancellor Rishi Sunak will unveil his annual Budget speech and spending review. Government officials have already confirmed a boost to the national minimum wage and Sunak is expected to announce an end to a public sector “pay pause”. The UK’s Office for Budget Responsibility will also publish its economic and fiscal outlook and the Bank of England will release capital issuance statistics.

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