Bond scares linger, investors look to Powell
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[March 04, 2021] By
Tom Arnold
LONDON (Reuters) - Worries about lofty U.S.
bond yields hit global shares on Thursday as investors waited to see if
Federal Reserve Chair Jerome Powell would address concerns about a rapid
rise in long-term borrowing costs.
The spectre of high U.S. bond yields also undermined low-yielding,
safe-haven assets, such as the yen, the Swiss franc and gold.
Benchmark 10-year U.S. Treasuries were at 1.458%. They earlier touched
their highest levels since a one-year high of 1.614% set last week on
bets on a strong economic recovery aided by government stimulus and
progress in vaccination programmes.
"Equities and yields continue to both drive and thwart one another,"
said James Athey, investment director at Aberdeen Standard Investments.
"Fed speech continues to express very little concern and certainly is
not suggestive of any imminent action to curb the rise in yields. The
Powell speech today is hotly anticipated, but I fear more out of hope
than rational expectation."
The Euro STOXX 600 was down 0.6% and London's FTSE 0.8% lower.
The MSCI world equity index, which tracks shares in 49 countries, lost
0.6%, its third day running of losses.
The MSCI's ex-Japan Asian-Pacific shares lost 2%, while Japan's Nikkei
fell 2.1% to its lowest since Feb. 5.
E-mini S&P futures slipped 0.2%. Futures for the Nasdaq, the leader of
the post-pandemic rally, fell 0.3%, earlier hitting a two-month low.
Tech shares are vulnerable because their lofty valuation has been
supported by expectations of a prolonged period of low interest rates.
But the market is focused on Powell, who is due to speak at a Wall
Street Journal conference at 12:05 p.m. EST (1705 GMT), in what will be
his last outing before the Fed's policy-making committee convenes March
16-17.
Many Fed officials have downplayed the rise in Treasury yields in recent
days, although Fed Governor Lael Brainard on Tuesday acknowledged that
concerns over the possibility a rapid rise in yields could dampen
economic activity.
In addition, anxiety is building over a pending regulatory change in a
rule called the supplementary leverage ratio, or SLR, which could make
it more costly for banks to hold bonds.
"The market is likely to be unstable until this regulation issue will be
sorted out," said Masahiko Loo, portfolio manager at AllianceBernstein.
"There aren't people who want to catch a falling knife when market
volatility is so high."
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Dividers are seen inside a trading post on the trading floor at the
New York Stock Exchange (NYSE), May 22, 2020. REUTERS/Brendan
McDermid/File Photo
The market will also have to grapple with a huge increase in debt sales after
rounds of stimulus to deal with a recession triggered by the pandemic.
The issue is not limited to the United States, with the 10-year UK Gilts yield
on Wednesday touching 0.796%, near last week's 11-month high of 0.836%, after
the government unveiled much higher borrowing.
On Thursday, Germany's 10-year yield was down 2 basis points to -0.31% after
rising 5 basis points on Wednesday, still moving in tandem with U.S. Treasuries.
Currency investors continued to snap up dollars as they bet on the U.S. economy
outperforming its peers in the developed world in coming months. [FRX/] The
dollar rose to a roughly seven-month high of 107.38 yen.
"U.S. dollar/yen has been on a one-way trajectory since the start of 2021," said
Joseph Capurso, head of international economics at the Commonwealth Bank of
Australia. "The brightening outlook for the world economy is a positive for both
U.S. dollar/yen and Australian dollar/yen."
Other safe-haven currencies were weakened, with the Swiss franc dropping to a
five-month low against the dollar and a 20-month trough versus the euro.
Other major currencies were little changed, with the euro traded at $1.2043,
down 0.15% on the day.
Buoyed by lower U.S. Treasury yields, spot gold was up 0.5% at $1,719.67 per
ounce, but still near a nine-month low.
Investor focus on a U.S. economic rebound was unshaken by data released
overnight that showed the U.S. labour market struggling in February, when
private payrolls rose less than expected.
Oil prices rose for a second straight session on Thursday, as the possibility
that OPEC+ producers might decide against increasing output at a key meeting
later in the day underpinned a drop in U.S. fuel inventories. [O/R]
U.S. crude rose 0.3% to $61.47 per barrel. Brent crude futures added 0.2% to
$64.19 a barrel,
(Additional reporting by Hideyuki Sano in Tokyo, Koh Gui Qing in New York;
editing by Larry King, Alexandra Hudson)
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