Wall Street stocks sell off as government bond rout accelerates

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Global government debt prices spiralled lower on Thursday, driven by a relentless sell-off of US Treasuries in anticipation of higher growth and stronger inflation in the world’s largest economy.

The yield on the US 10-year benchmark rose another 0.08 percentage points at the start of New York trading to hit 1.46 per cent, a fresh one-year high. The moves came despite Federal Reserve chairman Jay Powell on Wednesday downplaying the threat of a jump in consumer prices, pointing to slack in the US labour market.

Inflation expectations in the US, derived from the prices of inflation-protected government securities, are running at just under 2.2 per cent. Yields have risen rapidly since January, when the Democratic party won control of the Senate, bolstering President Joe Biden’s chances of getting his $1.9tn coronavirus bill through Congress and stoking fears the large stimulus will feed through to higher prices.

Bond investors dislike inflation because it erodes the cash value of the income payments on these debt instruments.

“The main theme in markets is reflation,” said Gregory Perdon, co-chief investment officer of private bank Arbuthnot Latham. “This causes bonds to sell off because if you believe inflation is heading towards 2 per cent, there is no reason to own a bond that yields less than this.”

Line chart of 10-year government yields (%) showing Australian and New Zealand yields soar in global bond rout

The US Treasuries sell-off followed ructions in the Australasia government debt markets overnight, where the yield on Australia’s 10-year security raced 0.13 percentage points higher to 1.86 per cent, its most elevated level since May 2019.

New Zealand’s benchmark bond yield soared more than 0.18 percentage points to just over 1.85 per cent, following a statement by finance minister Grant Robertson that the Reserve Bank of New Zealand should take overheating house prices into account when setting interest rates.

“Investors viewed this change as restricting the RBNZ’s ability to continue with ultra-easy monetary policy,” said Chris Scicluna, an economist at Daiwa.

European debt was also caught up in the wave of selling, despite some analysts arguing this was not justified.

Germany’s 10-year Bund yield added 0.06 percentage points to minus 0.24 per cent while the yield on the equivalent UK gilt jumped 0.08 percentage points to just under 0.8 per cent.

“Some of this [selling is] indiscriminate,” said Juliette Cohen, strategist at CPR Asset Management. “The gap between US and German bonds should be wider.

“The situation in Europe, where we have a delayed vaccination process and the reopening of economies is going to be more gradual, means there are fewer inflationary pressures than in the US.”

Cohen added that the “surprisingly rapid” run-up in Treasury yields, which inform what investors are willing to pay for companies’ shares, “has made us cautious on US equities, where valuations are tight”. The tech-focused Nasdaq Composite index has risen about 90 per cent since March last year.

On Thursday the S&P 500 was 0.5 per cent lower in early trades and the Nasdaq lost 0.7 per cent.

Across the Atlantic, European equities drifted between modest gains and losses, with the regional Stoxx 600 index flat in early afternoon and London’s FTSE 100 gaining 0.2 per cent.

In currencies, the Australian dollar, which is often viewed as a proxy for global commodities prices, added 0.2 per cent to just under $0.80 — its strongest since February 2018.

Brent crude, the international oil benchmark, hit a 13-month high of $67.70 a barrel before paring back to $66.83.

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