US bond sell-off accelerates on expectations of more aggressive Fed tightening

US government bonds sold off on Tuesday while stocks rallied as comments from Federal Reserve officials added to expectations of aggressive action from the central bank to rein in inflation.

Charles Evans, Chicago Fed president, said that the central bank is likely to raise interest rates to between 2.25 per cent and 2.5 per cent by the end of the year, and may need to raise them further if inflation persists. James Bullard, president of the St Louis branch of the Fed, also on Tuesday said that a jumbo 0.75-percentage-point rate increase may come at some point this year.

The yield on the 10-year Treasury note indexed to inflation — the so-called real yield — on Tuesday moved into positive territory for the first time since March 2020, according to Tradeweb. Real yields have rocketed higher this year as the Fed has tightened policy, driving yields higher more broadly and increasing pressure on riskier parts of financial markets.

The yield on the two-year note, which moves with expectations of interest rate policy, rose as high as 2.61 per cent, its highest level since January 2019. At the longer-dated end, the yield on the 30-year Treasury note rose above 3 per cent for the first time since 2019.

The moves came as traders await a speech on Thursday by Jay Powell, Fed chair, which may offer signs about how aggressively the central bank will raise rates this year after the annual pace of consumer price growth hit 8.5 per cent in March.

The technology-heavy Nasdaq Composite closed the day up 2.2 per cent, while Wall Street’s broad S&P 500 share index added 1.6 per cent, led by consumer discretionary stocks.

After the bell on Tuesday, streaming service Netflix fell by more than 20 per cent in after-hours trading after reporting its second-quarter earnings, which detailed a drop in subscribers for the first time in more than a decade.

The only S&P subsector in the red on Tuesday was energy, as Brent crude, the international oil benchmark, fell to $102.56 a barrel, 5.2 per cent lower.

“The drop in oil prices after a four-day rally appears to be the main driver of US equity market strength today,” said Christopher Murphy, co-head of derivatives strategy at Susquehanna International Group.

The gains for US equities came despite the announcement from the IMF on Tuesday that it had cut its global growth forecast for 2022 to 3.6 per cent, down 0.8 percentage points since its January projections, saying “global economic prospects have been severely set back, largely because of Russia’s invasion of Ukraine”.

Europe’s regional Stoxx 600 gauge closed 0.8 per cent lower. Germany’s Xetra Dax lost 0.1 per cent and London’s FTSE 100 fell 0.2 per cent.

Eurozone bonds were also hard hit. The IMF said commodity-importing nations in Europe would be more affected than the US by fuel and food price surges caused by the conflict.

“Europe is in more of a precarious situation than the US,” said Mary Nicola, multi-asset portfolio manager at PineBridge. “We see impacts on sentiment and economic activity that aren’t going to go away.”

The yield on Germany’s 10-year Bund rose 0.07 percentage points to 0.91 per cent — having earlier reached its highest level since July 2015 — as the prospect of sustained inflation in the eurozone damped the appeal of bonds’ fixed-income payments and raised expectations that the European Central Bank would lift interest rates.

“There is more concern about inflation in Europe, and expectations of the ECB raising interest rates are being baked in,” said Brian Nick, chief investment strategist at Nuveen.

In Asia, Hong Kong’s Hang Seng share index fell 2.3 per cent after Chinese regulators banned the lucrative business of livestreaming unauthorised video games.