US government bond decline resumes after Fed’s Jay Powell speech

Government bond prices suffered another blow on Thursday, prompting benchmarks to erase nearly all of the year’s gains, after comments from Federal Reserve Chairman Jay Powell failed to reassure consumers. investors.

As prices fell, the yield on the 10-year US Treasury bill climbed to 1.55%, up 0.07 percentage points from the previous day and continuing a sharp rise that has spread to debt issued by other countries.

In equities, the benchmark S&P 500 extended recent losses, briefly erasing its gains for the year with a decline of 1.7%. The index subsequently recovered some of its losses and fell 1.3% in the afternoon in New York. The tech-driven Nasdaq Composite slipped 2%, turning negative for the year.

“When returns go up – and we’ve had pretty high valuations from all of the markets – the market discounts,” said Shana Sissel, chief investment officer at Spotlight Asset Group. “I see this sale as the market taking a break, it was very, very hot, and you could argue for an overbought.”

Investors were waiting to see if the fed would respond to the massive sell-off of government bonds in recent weeks with a stronger message or hints of further intervention to calm the market.

At an event hosted by the Wall Street Journal, Powell said he would be “concerned” about continued tightening of financial conditions and that the the central bank would be “patient” in the face of a temporary rise in inflation.

“It was a really interesting day because the market was really firm, a little hesitant but firm, and then Powell spoke up,” said George Cipolloni, portfolio manager at Penn Mutual Asset Management. “He really didn’t say anything drastically different, other than that they’re not on target yet. . . which shakes the markets. “

The 10-year Treasury yield, which serves as the benchmark for borrowing costs and asset prices around the world, rose rapidly, rising to around 0.9% at the start of the year. Long-term treasury prices have fallen about 10% so far this year, according to a Bloomberg Barclays index.

Goldman Sachs revised its 10-year Treasury forecast upwards on Thursday, marking the benchmark to trade at 1.9% by year-end. In November, they expected yields to be around 1.3 percent.

In currencies, the dollar jumped 0.6% against a basket of half a dozen major currencies on Thursday, following higher yields on treasury bills.

Line graph of the equilibrium rate (%) showing that inflation expectations in the United States are pushing up

Investors have offloaded Treasuries as President Joe Biden pushes his $ 1.9 billion coronavirus relief package through the US legislature, giving hope that strong stimulus spending will create strong economic growth and fuel inflation. A measure of medium-term inflation expectations, known as the five-year break-even rate, reached 2.51% on Thursday, the highest level since 2008.

The Fed continues to buy at least $ 120 billion in financial assets each month to add liquidity to financial markets, as part of its emergency response to the pandemic that has helped drive global stock markets to new heights. records.

In Europe, the Stoxx 600 stock index and the FTSE 100 index both ended the day down 0.4%. Brent crude, the benchmark oil, gained 5 percent to just under $ 67 a barrel after Opec and its allies refrained from significantly increasing production.

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