Bond Market Storm Eases, But Bears Still on the Hunt

As U.S. Treasury yields stabilized at multi-year highs following the worst selloff in years, world stocks edged higher and Wall Street was tipped for a firmer beginning on Tuesday. On expectations that central banks may have to accelerate policy tightening to combat growing inflation, Monday’s selloff confirmed a so-called bear market for the S&P 500 equity index, which is down more than 20% from its most recent closing high.

As a result of these predictions, U.S. 10-year borrowing costs, the global economy’s benchmark interest rate, reached 3.44 percent on Monday, the highest level since 2011. While yields fell to roughly 3.3 percent on Tuesday, they are still 180 basis points (bps) higher than they were at the end of 2021. Markets were waiting to see if the Federal Reserve would hike rates by 75 basis points instead of the 50 basis points expected earlier in the day.

Several investment firms, including Goldman Sachs, are now predicting that possibility, which is nearly fully priced in for Wednesday and would be the largest increase since 1994. Traders have also increased their bets on how high-interest rates will rise, forecasting a peak of roughly 4% next year, up from the previous forecast of 3%. Stocks, cryptocurrency, junk-rated bonds, and emerging markets have all suffered as a result of this repricing, which benefited from ultra-low interest rates.

“Quite simply, when we see monetary tightening in the order of what we are seeing globally, something is going to break,” said Timothy Graf, State Street’s head of EMEA macro strategy. “Stock markets are reflecting the reality of the first-order effect of tighter financial conditions,” Graf said, warning that more pain was on the way because U.S. stock valuations were still above COVID-time lows. He went on to say, “I think there are other shoes to drop.”

After Monday’s 3.7 percent drop, MSCI’s global stock index (.MIWD00000PUS) and a pan-European equity index both remained unchanged (.STOXX). However, on Wall Street, the pressure was mounting again, with the S&P 500 and Nasdaq futures both up around 1%, reversing some earlier larger gains. Asian stocks sank 1% early, matching Monday’s gloomy Wall Street session, in which the S&P 500 (.SPX) and Nasdaq indexes (.IXIC) lost 4% and 4.7 percent, respectively.

There was little respite for crypto markets, which saw bitcoin and ether hit new 18-month lows in response to interest rate forecasts and the decision by crypto lender Celsius Network to halt withdrawals. Bitcoin has dropped to a low of $20,816, down more than 50% year to date and 28% since Friday.

The latest selloff in global markets was sparked by U.S. statistics on Friday that showed annual inflation in May increased by 8.6%. The resulting bond selloff increased two-year U.S. rates by more than 50 basis points in two sessions, sending them beyond 10-year borrowing costs on Monday, in what is known as a “curve inversion,” which is seen to be a sign of impending recession.

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On Tuesday, two-year rates fell to 3.26 percent, down from a high of 3.43 percent in 2007, the highest since 2007. In recent days, the dollar has experienced a renewed rush, reaching a new 20-year highs against a basket of currencies. It fell 0.4 percent on Tuesday, providing some relief to other currencies, such as the euro, which gained 0.7 percent. The dollar-yen rate is in the spotlight, with the former nearing 24-year highs versus the Japanese currency.

Few anticipate the yen to recover after the Bank of Japan increased asset purchases on Tuesday and is unlikely to deviate from its ultra-low rates policy at its meeting on Friday. “Given Wednesday may see the Fed go 75 bps and flag more, while the BOJ on Friday will only flag more bond-buying, the yen is not going to stay at these levels for long. It’s going to get much, much worse, “Michael Every, a Rabobank strategist, stated.

Fears of a recession, on the other hand, had no effect on oil prices. Brent futures climbed above $123 a barrel as restricted supply highlighted future inflation concerns.

“Commodity prices are set on the global market, and prices are rising for countries close and far. Cost-push inflation is not transitory anymore “Clients were told by Agnès Belaisch, the Barings Investment Institute’s chief European strategist.