US Treasuries sell off as traders look ahead to rate rises

European stocks and Wall Street equity futures fell on Tuesday, while Treasuries sold off, as US markets were poised to reopen after a holiday with traders looking ahead to interest rate rises.

The regional Stoxx 600 share index fell 1 per cent in early dealings, with London’s FTSE 100 down 0.6 per cent.

Futures contracts that bet on the direction of Wall Street’s Nasdaq 100, which is stacked with tech and other highly-valued growth companies that are sensitive to expectations of tighter monetary policy, dropped 1.6 per cent. Those tracking the broader S&P 500 index fell 0.9 per cent.

The yield on the benchmark 10-year Treasury note, which rises as the price of the government debt instrument falls, rose 0.05 percentage points to 1.823 per cent as prospects of higher rates on cash deposits and sustained inflation made the security’s fixed interest payments less appealing.

Meanwhile, the yield on the two-year Treasury note, which closely tracks interest rate expectations, rose 0.06 percentage points to 1.02 per cent — a level not seen since February 2020.

Investors’ expectations are building for the US Federal Reserve to raise rates more than three times this year, after tethering them close to zero in March 2020, in response to soaring inflation. They are also grappling with slowing corporate earnings growth following a rebound in 2021 from the coronavirus-induced economic shocks of the previous year.

“Conviction [has] hardened that the Fed were set to embark on a regular series of rate hikes starting in March,” Deutsche Bank strategist Jim Reid said in a note to clients.

Markets were now anticipating four rate hikes this year, Reid said. “Bear in mind that at the start of October, futures were pricing in just a single hike in 2022,” he added.

Meanwhile, analysts surveyed by data provider FactSet expect S&P-traded companies to report aggregate earnings growth of 22 per cent in the fourth quarter, year on year, compared with 40 per cent in the preceding three-month period.

Some analysts have tipped European equities to outperform the US this year as the European Central Bank has ruled out rate rises. But a rapid pick up in eurozone bond yields, driven by moves in the Treasury market, may also place downward pressure on European stock market valuations.

Germany’s 10-year Bund yield, a benchmark for European businesses’ and households’ borrowing costs, traded at minus 0.02 per cent on Tuesday as it remained close to climbing above zero for the first time since 2019.

In Asia, Hong Kong’s Hang Seng share index fell 0.5 per cent and the Nikkei in Tokyo closed 0.3 per cent lower. The yen traded at close to a five-year low against the dollar after the Bank of Japan opted to keep its main interest rate negative.

Brent crude, the oil benchmark, added 1.4 per cent to $87.71 a barrel — reaching a new seven-year high on Tuesday.

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