US government bond prices fall further ahead of key Fed meeting

US government bonds came under renewed selling pressure on Monday as traders prepared for the Federal Reserve to boost borrowing costs against an increasingly uncertain global economic backdrop.

The yield on the 10-year Treasury note rose as high as 2.992 per cent in New York trading, leaving it on the verge of hitting 3 per cent for the first time since late 2018, according to Tradeweb data.

Yields have shot higher since the start of the year on expectations that the Fed will sharply increase borrowing costs in an attempt to stem surging inflation, which hit 8.5 per cent on an annual basis in March – its fastest clip in 40 years.

In advance of the Fed’s much-anticipated policy meeting on Wednesday, markets are pricing in an extra-large interest rate rise of half a percentage point, followed by increases of the same size at the next two meetings. The current range stands at 0.25-0.5 per cent, after the Fed raised rates in March for the first time since 2018.

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The Fed’s move to rein in its crisis-era stimulus comes as the global economy is showing signs of strain from supply-chain issues, the war in Ukraine and flare-ups of coronavirus.

Surveys of industry executives released at the weekend showed that activity in China’s sprawling factory sector contracted last month at the fastest pace since February 2020 as the country’s economy reels from coronavirus lockdowns. At the same time, purchasing managers’ indices released on Monday pointed to slowing activity growth in the euro zone and US factory sectors.

The combination of high inflation and a weakening global outlook has raised questions about how much the Fed will be able to lift interest rates before it risks weighing too heavily on the economy.

“While it’s clear that this economy doesn’t need stimulative monetary policy, what is less clear is the speed at which this stimulus should be removed, and the reasons for choosing that speed,” said Alex Roever, US rates strategist at JPMorgan. He added that the Fed now faced a “thick stew of uncertainties”, including rising labour costs, supply-chain problems “newly aggravated with pandemic resurgence and response” and commodity cost problems caused by the war in Ukraine.

The dollar index, which measures the greenback against a basket of six other currencies, rose 0.6 per cent as US bond yields climbed on Monday. The gauge is sitting just below the 20-year high it reached last week.

Equities on Wall Street fluctuated as traders examined the gloomy economic data and expectations for an imminent increase in borrowing costs.

The benchmark S&P 500 moved between gains and losses, while the technology-heavy Nasdaq Composite traded flat, having posted steep declines in the previous session. The Nasdaq’s fall for April as a whole came to 13.3 per cent, marking its worst monthly drop since the depths of the global financial crisis in 2008.

Meanwhile, in Europe, the regional Stoxx 600 slid as much as 3 per cent before trimming its losses to trade 1.5 per cent lower. - Copyright The Financial Times Limited 2022