Bonds Fall, Dollar Jumps as Fed Messaging Digested: Markets Wrap

Government bonds fell as traders speculated central banks will keep interest rates elevated to quell inflation. A gauge of dollar strength hit its highest level this year.

(Bloomberg) — Government bonds fell as traders speculated central banks will keep interest rates elevated to quell inflation. A gauge of dollar strength hit its highest level this year. 

A bond selloff extended into a fourth week as the US Treasury 10-year yield climbed nearly 10 basis points to a high of 4.53%, a level last seen in 2007. Bloomberg’s Dollar Spot Index rose for a fourth day, reaching the highest since December.

The S&P 500 and tech-heavy Nasdaq 100 turned higher in choppy trading as traders returned to their desks following the worst weekly selloff on Wall Street since March. Among individual movers, Netflix Inc. rose 0.9% leading film and TV producers higher, after striking Hollywood screenwriters reached a tentative new labor agreement. By contrast, Foot Locker Inc. and Nike Inc. slid following a Jefferies downgrade on the stocks over looming consumer headwinds.

After the salvo of central bank decisions last week, traders are increasingly concerned that rising oil prices risk fanning inflation, which will make it difficult for policymakers to reduce rates anytime soon. Hedge funds boosted exposure to oil on bets tightening supplies will stoke demand. 

“Even as some investors are increasingly hopeful about the end of the current tightening cycle, there are several reasons to believe that the full impact from tighter monetary policy is still yet to take effect,” said Henry Allen, a strategist with Deutsche Bank. “As such, it will be some months before we can sound the all clear for the economy, not least given longer-term interest rates are still reaching new highs even now.”

Fed Bank of Chicago head Austan Goolsbee said it’s still possible for the US to avoid a recession. “I’ve been calling that the golden path and I think it’s possible, but there are a lot of risks and the path is long and winding,” he said in a CNBC interview.

Two Fed officials last week said at least one more rate hike is possible and that borrowing costs may need to stay higher for longer for the central bank to ease inflation back to its 2% target. While Boston Fed President Susan Collins said further tightening “is certainly not off the table,” Governor Michelle Bowman signaled that more than one increase will probably be required. 

Bond Market Is Starting to Believe ECB Higher-for-Longer Pledge

Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, said markets are having to contend with “the reality of regime change” even with the Federal Reserve’s largely expected pause on interest rates at the last meeting.

“Thus far, fixed income investors have paid the steepest price, but expensive stocks with valuations premised on low rates may be increasingly vulnerable,” she wrote in a note to clients. “Unlike other periods, when the rising tide of falling rates lifted all boats, adjusting to higher rates is likely to be an idiosyncratic affair favoring stock selection.”

A surge in oil prices and massive fiscal deficit are spurring losses in government debt, sending Treasury yields across the maturity curve to the highest levels in more than a decade. The Treasury 10-year yield may rise to 4.75% before softer risk sentiment and tighter financial conditions push it lower into year-end, according to strategists at Bank of America Corp. 

Meanwhile, fresh signs of concern for China’s property developers were highlighted after China Evergrande Group missed a debt payment, adding to fears about its debt pile. That’s compounding concern that global growth will stall as the economic engine of China sputters.

Key events this week:

  • Minneapolis Fed President Neel Kashkari in Q&A, Monday
  • ECB’s Francois Villeroy de Galhau speaks on monetary policy, Monday
  • US new home sales, Conference Board consumer confidence, Tuesday
  • ECB’s Philip Lane speaks on monetary policy, Tuesday
  • China industrial profits, Wednesday
  • US durable goods, Wednesday
  • Eurozone economic confidence, consumer confidence, Thursday
  • US initial jobless claims, GDP, Thursday
  • Fed Chair Jerome Powell town hall meeting with educators while Richmond Fed President Tom Barkin, Chicago Fed President Austan Goolsbee make speeches, Thursday
  • Eurozone CPI, Friday
  • Japan unemployment, industrial production, retail sales, Tokyo CPI, Friday
  • US consumer spending, wholesale inventories, University of Michigan consumer sentiment, Friday
  • ECB President Christine Lagarde speaks, Friday
  • New York Fed President John Williams speaks, Friday

Some of the main moves in markets:


  • The S&P 500 rose 0.2% as of 11:19 a.m. New York time
  • The Nasdaq 100 rose 0.3%
  • The Dow Jones Industrial Average was little changed
  • The Stoxx Europe 600 fell 0.7%
  • The MSCI World index fell 0.2%


  • The Bloomberg Dollar Spot Index rose 0.4%
  • The euro fell 0.6% to $1.0589
  • The British pound fell 0.3% to $1.2208
  • The Japanese yen fell 0.3% to 148.81 per dollar


  • Bitcoin fell 1.2% to $26,190.67
  • Ether fell 0.7% to $1,579.36


  • The yield on 10-year Treasuries advanced seven basis points to 4.50%
  • Germany’s 10-year yield advanced four basis points to 2.78%
  • Britain’s 10-year yield advanced six basis points to 4.31%


  • West Texas Intermediate crude fell 0.7% to $89.37 a barrel
  • Gold futures fell 0.5% to $1,936.20 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Cecile Gutscher, Denitsa Tsekova, Alex Nicholson, Constantine Courcoulas and Krystof Chamonikolas.

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