The US government’s debt crisis deepened on Wednesday after a top Federal Reserve official signaled a rapid change in the central bank’s pandemic-era support for financial markets.
The benchmark 10-year U.S. Treasury note yield, which went against its value and underpinned global borrowing costs, added 0.05 percentage points to 2.61 percent, which has not been seen since early 2019.
The two-year Treasury yield, which tracks interest rate expectations, rose 0.07 percentage points to 2.57 percent.
In the stock market, regional stocks Europe 600 shares fell 0.1 percent and London’s FTSE 100 lost 0.2 percent, after data signaled that China’s services sector had been hit hard by the coronavirus lockdown.
Fed Governor Lyall Brainard said Tuesday that a “rapid” decline in the US Federal Reserve’s balance sheet could begin in May. The balance sheet has swelled at $ 9tn since the Fed announced in March 2020 the purchase of unlimited bonds to curb borrowing costs for businesses and families during the coronavirus crisis.
With U.S. consumer inflation hovering at a 40-year high and potentially further sanctions on Russian energy sources threatening to spike further, analysts also expect the Fed to aggressively raise interest rates this year. The minutes of the Fed’s March policy meeting, to be released on Wednesday, are expected to signal how quickly this process will take place.
“Higher inflation will require more aggressive monetary policy from the central bank, and we now see the Fed moving much faster, 50 [basis point] Next 3 meetings and a terminal hike [interest] The rate is 3.6 percent by mid-2023, ”said Deutsche Bank strategists in a note addressed to clients.
While equity markets have been less vulnerable to inflation and Russia’s aggression in Ukraine, a key measure of the gap between stock and bond returns has remained favorable. Actual yields in the 10-year Treasury – investors return after inflation – are below zero, which makes the dividend payment of stocks relatively attractive.
City cash strategists led by Robert Buckland said in a research note, “Cash / bonds still provide negative real returns, with investors tending to decline in global equities.”
Stokes is trading above its level on the eve of the February 23 attack on President Vladimir Putin in Ukraine. Wall Street’s benchmark S&P 500 index is up nearly 7 percent.
In Asia, Hong Kong’s Hang Seng Index fell 1.2 percent and China’s CSI 300 fell 0.3 percent as both trades reopened after the holidays. Japan’s Nikkei 225 fell 1.6 percent.
According to a private sector survey, China’s service sector suffered the worst contraction since February 2020 at the start of the coronavirus epidemic.
The Caixin Service Purchasing Managers’ Index, which asks companies in the sector whether they have experienced an increase or decrease in business activity over the previous month, came in at 42.0 on Wednesday, below the 50-point threshold that separates contraction from expansion.
China has been battling its worst coronavirus outbreak since the epidemic began, with severe lockdowns in several cities, including the commercial hub of Shanghai.