US stocks were little changed and bond yields remained near their highest levels in three years as investors braced for a Federal Reserve rate hike campaign.
The S&P 500 slipped 0.1% in early trade on Monday. Last week, US stocks rallied for the second consecutive month. The technology-focused Nasdaq Composite rose 0.1%, while the Dow Jones Industrial Average fell 0.2%.
Fed officials recently signaled that the central bank will raise interest rates by half a percentage point if the economic outlook calls for it, rather than the more usual quarter-point change. This has caused economists and investors to reassess how quickly they expect interest rates to rise.
Some investors have started selling holdings of government bonds in anticipation. Yields on the benchmark 10-year Treasury initially rose early Monday before falling to 2.462% from 2.491% on Friday. Yields fall when prices rise.
Yields on some of the short- and intermediate-dated government bonds that are most sensitive to Fed policy rose more than those on longer-dated bonds.
The yield on the two-year government bond stood at 2.315% on Monday, about 0.15 percentage point off the level on the 10-year note. An inversion, in which the 2-year note yields more than the 10-year note, has historically been tracked by investors as a predictor of a recession.
Traders worked on the floor of the New York Stock Exchange on March 21, 2022.
Photo: BRENDAN MCDERMID/REUTERS
Government bond yields set a floor for interest rates throughout the economy and are an important input to financial models that investors use to value stocks and other investments. Rising yields tend to weigh on technology stocks in particular, as the ability to earn higher risk-free returns from bonds means investors are less interested in companies valued for their more distant earnings potential.
Apple’s shares fell 1% in early trading. Tesla shares surged nearly 5% after the electric-car maker said it would seek shareholder approval at its annual meeting to increase the number of shares the company holds to allow for a stock split.
Oil prices fell after Shanghai imposed tough pandemic restrictions that could weaken energy demand. Brent crude futures, the international benchmark, fell 5.7% to $110.70 a barrel. Concerns about how Russia’s war with Ukraine will disrupt energy production have pushed oil prices up by about $100 a barrel in recent weeks. Rising prices have also fueled concerns that consumers may have less money to spend on non-essential items, weighing on growth.
“The market is currently assuming that [higher energy prices] will dampen the pace of growth and central banks will tighten,” said Mike Bell, global market strategist at JP Morgan Asset Management. However, the extent to which central banks could raise interest rates will likely depend on global growth and whether higher energy and oil prices will require lower interest rates to cushion growth, he added.
Federal funds futures — derivatives used by traders to bet on where interest rates are going — show that since last week investors have increased their bets on a 50 basis point rate hike at the Fed’s May meeting.
An inversion in the US Treasury yield curve has been a warning sign of a recession for decades, and it looks set to flare up again soon. The WSJ’s Dion Rabouin explains why an inverted yield curve can so reliably predict a recession and why market watchers are now talking about it. Figure: Ryan Trefes
Russia’s benchmark MOEX index fell 2.2% in a shortened session on Monday as Moscow allowed all Russian stocks to trade. Foreigners are prohibited from selling shares, which helps support the benchmark’s level.
The pan-continental Stoxx Europe 600 gained 0.7%. Barclays shares fell 2.1% after the British bank announced it was buying back a bunch of structured notes at a loss of around £450m or $591m after selling too many of them.
In cryptocurrencies, Bitcoin’s dollar value is up 2.4% from its Sunday at 5:00 p.m. ET to $47,173.19, according to CoinDesk.
The Japanese yen fell 1.2% against the dollar to a more than six-year low after the Bank of Japan signaled it would limit rising yields.
Investors had begun to speculate that the central bank would not step in to limit the rise in bond yields as the country’s benchmark 10-year bonds neared the top of the Bank of Japan’s 0.25% target range. That expectation was reversed on Monday after the Bank of Japan offered to buy an unlimited amount of 10-year Japanese government bonds at a fixed rate of 0.25%. The 10-year yield currently stands at 0.24%.
“The fact that they didn’t intervene in the yield curve where they previously intervened suggested they could allow the curve to steepen. That was blown out of the water so you saw the narrative change quite aggressively,” said Simon Harvey, head of forex analysis at broker Monex Europe.
Investors are likely to sell Japan’s local currency bonds, thereby selling the yen against bonds issued by countries that are raising interest rates, allowing for higher yields.
Major indices in Asia ended with mixed performance. China’s Shanghai Composite rose 0.1%. South Korea’s Kospi was flat and Japan’s Nikkei 225 fell 0.7%.
Write to Caitlin Ostroff at [email protected]
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