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Treasury markets are in full-fledged selloff mode ahead of
minutes from the Federal Reserve's March meeting.
With a half-point interest rate rise mostly baked in for May,
the debate has moved on to whether the Fed could kick off
balance sheet reduction next month as well.
On Tuesday two normally dovish Fed officials, governor Lael
Brainard and San Francisco Fed chief Mary Daly, precipitated a
fresh Treasury selloff with suggestions the run-off might
commence next month -- alongside a rate hike.
Ten-year Treasury yields have jumped to the highest in three
years, up some 20 basis points since Friday. And with the Fed
apparently poised to become even more aggressive on inflation,
the 2-year/10-year Treasury curve has normalised, having been
inverted for around a week.
What bears watching is the "real" or inflation adjusted Treasury
yield, the variable that can determine how much sense it makes
to invest in riskier assets such as stocks and emerging markets.
Ten-year real yields remain negative but at -0.26%, they are on
their way back to zero, levels not seen since March 2020.
Remember, they were below -1% at the start of this year.
On stocks, Tuesday's Nasdaq-led Wall Street selloff carried into
Asia, pushing Japan's Nikkei 1.7% lower. Some stabilisation is
creeping in however, with European shares marginally lower and
U.S. equity futures flatlining.
Europe has other problems to contend with, and not just the
prospect of economic recession caused by the Russia-Ukraine war.
French markets have woken up to the possibility that the
country's two-round presidential election (April 10 and 24)
might yield a shock win for far-right candidate Marine Le Pen.
The euro has slipped to a one-month low versus the buoyant
dollar. Further weakness may be bad news for the inflation
outlook especially as factory inflation is likely to have topped
30% in March.
Graphic: Balance sheet-
https://fingfx.thomsonreuters.com/
gfx/mkt/dwpkrqyqgvm/Pasted%20image%201649228661786.png
Key developments that should provide more direction to markets
on Wednesday:
-China's services sector PMI hit hard by Omicron surge
-German industrial orders fell in Feb
-ECB speakers: Executive Board Philip R. Lane; ECB's Executive
Board member Fabio Panetta; ECB's Executive Board member Isabel
Schnabel; ECB Vice President Luis de Guindos
-Fed speakers: Philadelphia President Patrick Harker; San
Francisco Fed president Mary Daly
-Polish central bank seen lifting rates by 50 bps
(Reporting by Sujata Rao; editing by Dhara Ranasinghe)
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