June 27, 2022

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US government debt under pressure as traders await Fed minutes

2 min read

A US government debt downturn deepened on Wednesday and stock markets fell, after a top Federal Reserve official signalled a rapid reversal of the central bank’s ultra-loose pandemic-era policies.

The yield on the benchmark 10-year US Treasury note, which moves inversely to its price and underpins borrowing costs worldwide, added 0.07 percentage points to 2.62 per cent, a level not seen since early 2019.

The yield on the policy-sensitive two-year note rose 0.06 percentage points to 2.57 per cent, sitting just below that of the longer-dated debt instrument. This part of the so-called yield curve inverted last month for the first time since 2019, in what economists typically view as an indication of a looming recession.

In equities, the Stoxx Europe 600 dropped 1 per cent in morning trades and London’s FTSE 100 lost 0.6 per cent, following falls in Asia earlier in the day. Futures trading implied the S&P 500 would edge 0.4 per cent lower in early New York dealings.

Fed governor Lael Brainard on Tuesday said a “rapid” reduction of the US central bank’s balance sheet could start in May. The balance sheet had swelled to $9tn since the Fed announced unlimited bond purchases in March 2020, which lowered Treasury yields and in turn reduced loan rates.

With US consumer price inflation running at a 40-year high and potential further sanctions on Russian energy resources threatening to cause more spikes, analysts also expect the Fed to raise interest rates aggressively this year. Minutes from the Fed’s March policy meeting, to be released later on Wednesday, are expected to offer clues as to how swiftly this process will occur.

“By removing these asset purchases and selling bonds that are on the balance sheet,” said Juliette Cohen, strategist at CPR Asset Management, “it says we don’t need so much [monetary] accommodation due to the high level of inflation, and reinforces the idea they will be hiking interest rates.”

Equity markets have been…

2022-04-06 05:42:09

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