A selloff in bonds deepened Tuesday after Federal Reserve Chair Jerome Powell struck a more hawkish tone in his campaign against inflation. Stocks in Asia pushed higher, weathering the volatility.
Treasuries extended losses after short-dated yields Monday posted one of the biggest daily climbs of the past decade. Australian and New Zealand debt slid. The gap between five-year and 30-year U.S. yields is around the narrowest since 2007, signaling an economic slowdown as the Fed hikes borrowing costs.
Export-reliant Japan’s bourse rose as the yen fell to a six-year low against the dollar. Commodity and energy stocks bolstered MSCI Inc.’s regional index. China and Hong Kong fluctuated, while U.S. and European futures retreated.
Powell said the Fed is prepared to raise interest rates by a half percentage-point at the next policy meeting if needed. It hiked by a quarter-point last week and signaled six more such moves this year. The dollar advanced.
Oil extended a rally, with Russia’s war in Ukraine nearing the one-month mark and no conclusion in sight. There are signs the European Union may be edging closer to a ban on Russian crude imports to punish Moscow for its invasion.
The trajectory of bonds is a focal point for investors fretting about a growth slowdown or even a recession. High inflation, stoked by commodity-market disruptions due to the war, has increased pressure on the Fed and some other key central banks to tighten monetary policy.
“If Powell is reinforcing that they are going to address inflation — that they’ve made mistakes, that their expectations of inflation were incorrect — just admitting that, and saying that we’re ready to do everything it takes, is definitely reassuring for equity investors,” Erin Gibbs, chief investment officer at Main Street Asset Management, said on Bloomberg Television.
Derivative traders Monday priced in about 7.5 quarter-point rate hikes at the remaining six Fed meetings this year, effectively making provision for more than one half-point rise.
“For the long term, 2.3% on the 10-year is not such a high figure at all,” Linda Duessel, senior equity strategist at Federated Hermes Inc., said on Bloomberg Television. “What spooks the market is when you have very quick moves, such as what we’re having now.”
Duessel said while Fed tightening might cause disruptions throughout the yield curve, the gap between the three-month and 10-year tenors is still steeply upward sloping, supporting the view that the U.S. economy remains strong.
While the Fed is tightening, expectations are growing that China will loosen monetary policy to support economic expansion.
China’s cabinet pledged stronger monetary-policy support while cautioning against flooding the market with liquidity, state broadcaster CCTV reported Monday. Authorities vowed to avoid measures that can hurt market sentiment.
