A global drop in government prices continued on Tuesday, pushing the most important medium-term yield in the US term to the highest since June and dropping Wall Street and European stock markets.
The yield on the 10-year U.S. Treasury bond, which serves as a benchmark for borrowing costs for companies and households worldwide, added 0.06 percentage points to 1,541 percent, a level not seen for more than three months.
The 10-year gold-plated return in the UK rose by 0.07 percentage points to 1,024 per cent, surpassing 1% for the first time since the March 2020 market crashes.
Wall Street’s blue-chip S&P 500 stock index opened 0.8 percent lower while the tech-heavy Nasdaq Composite fell 1.5 percent. Europe’s Stoxx 600 index fell 1.5 percent.
Revenue from government bonds, which is reversing to prices, has risen over the past week to track the expected rate hikes by US and UK central banks, which have signaled a move away from loose monetary policy in the pandemic period sustained high inflation.
The Treasury’s 10-year return, which rose about 1.3 percent a week ago, is also a barometer that investors use to determine the value of future earnings, cash flow and dividends from stock markets.
“As bond prices rise, it looks less attractive to equities, and especially those with very small dividend yields, such as in the technology sector,” said Rebecca Chesworth, senior equities strategist at State Street Global Advisers’ SPDR ETF business.
Last week, the Federal Reserve said it could move forward easily with a $ 120 billion-a-month reduction in bond purchases. The world’s most influential central bank has also revealed that half of its monetary policymakers expect the first post-pandemic rate hike in 2022.
The Bank of England has warned that inflation in the UK could rise to 4% by next year, prompting it to move closer to raising interest rates from the current record low.
German Bunds fell in parallel with Treasuries and gilts, yielding 10-year gains in the eurozone by 0.04 percentage points to minus 0.189 percent, the highest since early July.
The dollar index, which measures the US currency against six others, rose 0.3% to 93.6 points, the strongest level in more than a month.
Brent crude, the international benchmark for oil, crosses $ 80 a barrel for the first time since October 2018.
Oil traders expect demand to rise again as the travel industry recovers from the pandemic, while hurricanes Ida and Nicholas, which plagued the U.S. Gulf of Mexico in August and September, curtailed U.S. production. Analysts also expect rising natural gas prices in Europe to encourage electricity companies switch to oil for power generation.
Rising energy prices have caused a ‘stagflation story’ that is also causing stock investors concern, says Samy Chaar, chief economist at Swiss bank Lombard Odier.
This, he said, is exacerbated by ‘growing concerns from China’, while world investors wait to see if the Beijing authorities have any consequence of a debt crisis at Evergrande, a large Chinese home builder who missed an interest payment on bonds held by foreign investors last week.
Chaar added that if central banks match the interest rate hike with the above-mentioned economic growth next year, equities with higher dividend yields, such as those in the banking and energy sector, could perform better.
All sectors of the S&P 500 opened lower on Tuesday, apart from energy producers and equities for financial services.