CORRECTED-TREASURIES-Yields charge to 14-mth highs as dovish Fed to let inflation run hot
(Corrects first sentence to show that the Fed is expected to keep rates near 0% until at least 2024 instead of until at least 2023)
LONDON, March 18 (Reuters) – U.S. 10-year Treasury borrowing costs vaulted above 1.74% for the first time since January 2020, leading a worldwide move higher in bond yields after the Fed pledged to look past inflation and keep interest rates near 0% until at least 2024.
Government borrowing costs rose from Japan to Norway as signs grew of a global economic recovery gaining momentum, with some investors betting policymakers would have to act sooner rather than later.
Federal Reserve Chairman Jerome Powell repeated pledges to hold interest rates in an effort to keep economic recovery on track even if inflation breached its 2% target this year.
The Fed also upped economic growth forecasts to 6.5%, which would be the highest in almost 40 years, and predicted a fall in unemployment to 4.5%.
While Treasury yields slipped after the Fed’s Wednesday meeting, benchmark 10-year yields spiked in early London trade, denting the hitherto buoyant futures in the U.S. Nasdaq tech shares index.
The segment of the yield curve that measures the gap between yields on two- and 10-year Treasury notes — considered a reliable indicator of growth expectations — steepened by about 7 basis points to 157 basis points, the widest since July 2015.
“What surprised people was not the commitment to the policy stance but keeping the commitment to the same policy stance while upping growth forecasts and reducing unemployment forecasts more than expected,” said Sunil Krishnan, head of multi-asset funds at Aviva Investors.
“That dovishness is consistent with the yield curve steepening… the debate in the market is will events force the Fed’s hand?”
Expectations are that the $1.9 trillion U.S. fiscal stimulus package will boost economic growth and cause inflation to rebound.
Neil MacKinnon, global macro strategist at VTB Capital said that with no tightening likely in the near-term, “the market is pricing in the upcoming sharp improvement in economic data, which would show strong activity and consumption.”
While this is good news for parts of the equity market, bonds at the longer end of the curve are likely to feel the pressure.
Some reckon that higher inflation, currently seen as transitory, could well morph into something longer lasting as a result of the ultra-dovish central bank stance.
U.S. “real” or inflation-adjusted yields have jumped by 18 bps to -0.57% in the last one week, implying an effective tightening of financial conditions.
“These moves will certainly be a test of the Fed’s very accommodative policies,” MacKinnon added.
The two-year Treasury yield, which typically moves in step with interest rate expectations, was 1.8 bps higher at 0.147%.
“The question is at what level the equity and credit market start wobbling,” said Kenneth Broux, FX strategist at Societe Generale in London.
Futures tied to the S&P 500 fell 0.6%. The dollar index, which measures the greenback against a basket of peers, rose 0.3% reclaiming more than half of its losses on Wednesday.
The Treasury moves rippled out elsewhere, with German 10-year yields rising six bps to three-week highs.
Earlier, robust Australian jobs data boosted 10-year yields there by seven bps and Japanese borrowing costs rose after reports the Bank of Japan could allow 10-year yields to move wider
And Norway’s central bank became the first in the G10 to signal an interest rate hike this year, bringing forward guidance from 2022. Norwegian yields rose and the crown hit a 13-month high against the euro.
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