- US 10-year Treasury yields reached their highest level in 16 years
- Asian and European stocks fell by 0.5% amid widespread selling
- Traders see the Fed’s chances of raising interest rates by 0.25 basis points for January as around 50/50.
- The dollar is approaching the 150 yen level, which is considered the red line for Japan
LONDON (Reuters) – U.S. Treasury yields hit a peak not seen since the early aftershocks of the 2007-08 global financial crisis on Tuesday, as fears that interest rates would remain high for longer rattled riskier assets globally and pushed the dollar higher. . Highest level in 10 months.
Asian and European stock indices fell, with US stocks expected to follow suit, and crude oil prices fell due to recent comments by Federal Reserve officials that led to a steepening of the US yield curve.
The benchmark STOXX index of 600 European shares (.STOXX) fell 0.5%, in line with an earlier decline in MSCI’s broadest index of Asia-Pacific shares (.MIAP00000PUS).
The yield on 10-year Treasuries rose to 4.566%, the highest level in 16 years, while a huge series of US Treasury auctions this week and fears of a US government shutdown added to the volatile mood.
Bond yields, which move inversely with prices and rise when risks related to the issuer are seen to be increasing, remained high among euro zone sovereigns as the narrative persisted that central banks would keep interest rates higher for longer.
The German 10-year government bond yield, the euro zone’s benchmark, was little changed on the day at 2.789%, after briefly reaching a 12-year high of 2.813% in early trading.
The gap between yields on Italy’s benchmark 10-year BTP bond and safer German bonds rose to about 1.86 percentage points (186 basis points), the largest since late May, as Prime Minister Giorgia Meloni prepares for a tough 2024 budget.
Fears of closure
Minneapolis Federal Reserve Bank President Neel Kashkari said further rate hikes are likely to be needed given the surprising resilience of the US economy.
Tensions over the US government’s debt are exacerbated by efforts by the Republican-controlled House of Representatives to advance sharp spending cuts this week, which have no chance of becoming law but could lead to a partial government shutdown by next Sunday.
Hundreds of thousands of federal workers could be furloughed and public services suspended if Congress cannot fund the new fiscal year that begins on October 1.
Traders are now pricing in the odds that the Fed will raise interest rates again by a quarter of a percentage point by January, and have pushed the likely start of rate cuts into the summer.
Chicago Fed President Austan Goolsbee said Monday that inflation remaining firmly above the central bank’s 2% target remains a greater risk than tight Fed policy slowing the economy too much.
The European Central Bank and the Bank of England have also touted higher interest rates for a longer period in policy meetings since the middle of the month.
Red alert for JPY intervention
The US dollar index – which measures the currency against six major developed market currencies, including the euro and yen – rose 0.2% to 106.2, the highest level since November 2022, as the world’s largest economy continued its outperformance.
The strength of the dollar against the yen in particular has kept traders on alert to intervene to support the Japanese currency, especially after Finance Minister Shunichi Suzuki said on Tuesday that there were no options on the table.
The dollar settled near its highest level in 11 months at 148.97 yen overnight, with 150 yen to the dollar considered in financial markets a red line that could prompt Japanese authorities to act, as they did last year.
Gold fell slightly to $1,910.6, extending its decline from above $1,947 over the past week, as the bullion’s appeal waned amid a strong dollar.
Crude oil remained weak amid concerns that demand for fuel will be affected by major central banks keeping interest rates high for a longer period, even as supply is expected to tighten.
Brent crude futures fell 72 cents to $92.57 a barrel, while US West Texas Intermediate crude futures traded down 69 cents to $89.99.
(Reporting by Lawrence White and Kevin Buckland) Editing by Shri Navaratnam, Kim Coghill, Sharon Singleton and Alex Richardson
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