Borrowing costs

Short-term government bonds fall on prospect of higher borrowing costs

Short-term German and US government debt was liquidated as traders anticipated a tightening of monetary policy from the European Central Bank, after the Federal Reserve announced its intention to act aggressively to curb inflation .

The yield on the German two-year bond, which rises as its price falls and closely tracks eurozone interest rate expectations, hit 0.27% in European morning trade, its highest level since late 2013. The 10-year Bund yield rose 0.03 percentage points to 0.95%, continuing a stellar ascent from near zero in early March.

In equity markets, Europe’s Stoxx 600 stock index fell 1.4% as the specter of higher borrowing costs weighed on the outlook for corporate earnings, carrying the gauge’s loss for the year to date at more than 6%. Germany’s Xetra Dax lost 1.9% and the FTSE 100 in London fell 0.8%.

The moves came after Fed Chairman Jay Powell said a 0.5 percentage point interest rate hike was ‘on the table’ for May to combat the record high. consumer price inflation in 40 years, prompting a large sell-off in US Treasuries on Thursday. .

German Bundesbank President Joachim Nagel also said on Wednesday that the ECB should brace for its first rate hike in more than a decade after eurozone inflation hit an annual rate of 7.5. % last month.

“Other central banks tend to follow the Fed, so it’s not surprising [Europe] follows, with a bit of a delay,” said Salman Baig, portfolio manager at Unigestion. Communications from central bankers, he added, are now designed to “encourage people to save for tomorrow instead of spending today and curb demand.”

Markets are now pricing in a federal funds rate – the main central bank interest rate – of almost 2.8% by the end of the year, up from 0.25% to 0.5% currently.

The policy-sensitive two-year Treasury yield added 0.07 percentage point to 2.76%, trading at its highest level since December 2018.

The yield on the 10-year Treasury – which underpins borrowing costs around the world – rose 0.02 percentage point to 2.94%, following a broad debt sell-off sovereign Thursday.

Futures that track the S&P and the tech-heavy Nasdaq 100 fell 0.3% on Friday, following steep declines in the previous session.

In currencies, the pound fell 1.2% against the dollar to $1.287 – its weakest level since the end of 2020 – after official data showed UK retail sales fell rapidly in March, as high inflation exacerbated the cost of living crisis. The fall also came after the Financial Times revealed the UK government was preparing legislation that would allow it to tear up the Northern Ireland Protocol, jeopardizing the post-Brexit trade deal with the EU.

“It’s a perfect storm for the pound,” said Nicola Morgan-Brownsell, multi-asset fund manager at Legal & General Investment Management. “A large quantity [of the fall] It’s those weak retail sales figures, but Brexit risk has also returned to the headlines.

In Asia, China’s CSI 300 stock index gained 0.4% after the country’s securities regulator urged domestic banks and insurers to support the stock market. Japan’s Topix fell 1.2%.

Brent, the oil benchmark, fell 1.8% to just over $106 a barrel.