Bond yields hit fresh 1-month low as taper bets recede
World stock prices teetered near record highs on Wednesday, while U.S. bond yields touched their lowest levels in a month, as investors bet the Federal Reserve is some way off from tapering its economic stimulus.
Focus is locked on Thursday’s release of U.S. consumer price data and a European Central Bank meeting for further clues about how soon policymakers may begin to withdraw support for Europe’s economy rolled out following the COVID-19 crisis.
MSCI’s all-country world index last stood at 716.42, after hitting an intraday high of 718.19 on Tuesday, led by gains in Europe.
European stocks were 0.1% lower, with Britain’s FTSE down 0.5%. In Asia, the MSCI’s broadest index of Asia-Pacific shares outside Japan ticked down 0.3% and Japan’s Nikkei average shed 0.4%.
In the United States, Nasdaq futures were 0.2% firmer and S&P 500 futures up 0.1%.
The 10-year U.S. debt yield, on the other hand, hit a fresh month low for the second day running, reaching 1.504% and down a quarter of a percentage point from a 14-month peak hit in March.
Germany’s 10-year Bund yield, which is closely correlated with U.S. Treasuries, extended Tuesday’s drop to fall to -0.240%, the lowest since May 7 as euro area investors continued to price in a dovish outcome to the ECB policy meeting on Thursday.
“As the recovery in the job market is contained, any discussion at the Fed on tapering is unlikely to gain momentum, even if it starts soon,” said Naokazu Koshimizu, senior rates strategist at Nomura Securities.
“So those who had bet on steepening of the yield curve are unwinding their positions while some investors are also now buying to earn carry.”
U.S. payrolls data last Friday showed hiring did not grow as fast as economists had expected, despite increasing signs of a labour shortage.
Many analysts think more evidence of strong jobs growth would be required for the Federal Reserve to step up its discussion on tapering.
The U.S. central bank has said rises in inflation this quarter would be transient and would not threaten price stability, one of its key mandates.
Thursday’s U.S. consumer price data is expected to show the overall annual inflation rate rose to 4.7% and core inflation increased to 3.4%.
While those readings will be well above the Fed’s inflation target of 2%, many economists expect the inflation rate to ease in coming months, allowing the Fed to wait before taking any tapering measures.
Yet some investors remain wary.
“Nothing that we see in tomorrow’s report can prove or disprove any of the theories around the future path for inflation but I suspect that the market isn’t entirely believing of the Fed’s on-hold forever message,” said James Athey, investment director at Aberdeen Standard Investments.
“I therefore see potential for a higher print to push real yields and shorter dated yields higher thus flattening the curve and boosting the dollar. This might not be a great environment for risky assets.”
CURRENCIES STEADY
Inflation data from China showed its producer price index jumped 9.0% from a year earlier, the highest in over 12 years, on surging commodity prices.
The rise in consumer prices, however, was softer than expected, helping to mitigate concerns. While China’s central bank is slowly scaling back pandemic-driven stimulus, top leaders have vowed to avoid any sharp policy turns and keep borrowing costs low.
The Chinese yuan, whose rally to a three-year high last week was propelled in part by speculation Beijing may want a stronger yuan to tame inflationary pressure, ticked up slightly to 6.3945 per dollar.
Other currencies hardly budged. The U.S. dollar index was parked at 90.077.
The euro was steady at $1.2179, while the dollar held at 109.47 yen.
Deutsche Bank’s Currency Volatility Index hit its lowest level since February 2020 on Tuesday, and sank even further on Wednesday.
With European bond markets calm, Greece followed Italy with a bond sale, opening books on Wednesday for a 10-year issue.
Oil prices held firm after U.S. Secretary of State Antony Blinken said that even if the United States were to reach a nuclear deal with Iran, hundreds of U.S. sanctions on Tehran would remain in place.
U.S. crude futures closed above $70 per barrel for the first time since Oct 2018 on Tuesday and last stood at $70.40, up 0.5%.
Brent futures rose 0.5% to $72.56, having earlier touched their highest since May 20, 2019.
