10-yr Treasury yield hits 5%, stocks at seven-month lows
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[October 23, 2023] By
Amanda Cooper and Wayne Cole
LONDON/SYDNEY (Reuters) - The benchmark 10-year Treasury yield rose
above 5% and to its highest since 2007 on Monday, as a roaring U.S.
economy led investors to expect interest rates to stay high for an
extended period.
The combination of those higher yields and risk of a wider conflict in
the Middle East soured sentiment at the start of a week full of mega-cap
earnings and key data, and pushed global shares down to seven-month
lows.
The 10-year Treasury yield reached 5.012%, and was last up 8.6 basis
points on the day, the latest sign of the scale of the global bond sell
off, driven also by rising government debt increasing supply of bonds
around the world. [US/]
"5% from an economic perspective is just another number. But as far as
investors are concerned it resonates," Daiwa Capital chief economist
Chris Scicluna said.
"I don’t think it's a tipping point, but it's a reminder of the record
tightening we've had and it's a reminder, as far as the Fed is
concerned, that they can't be entirely sure quite how much of that
tightening so far has already been transmitted to the real economy and
how much more is to come," he said.
The recent surge in bond yields has tightened monetary conditions
without the central banks having to do anything, allowing the Federal
Reserve to signal it will likely stay on hold at its policy meeting next
week.
Indeed, futures imply around a 70% chance the Fed is done with
tightening for this cycle and are flirting with the chance of rate cuts
from May next year.
The jump has also challenged equity valuations and dragged most major
indices lower last week, while the VIX "fear index" of U.S. stock market
volatility hit its highest since March.
The MSCI All-World index was last down 0.2%, at its lowest since late
March, when turmoil that had gripped the global banking sector started
to subside.
In Europe, the STOXX 600 was down 0.5%, also at seven-month lows, and
rate-sensitive real estate stocks dropped to their lowest since 2012.
U.S. index futures were last down around 0.5%.
The war in the Middle East was also high on investors' minds. Washington
warned over the weekend of a significant risk to U.S. interests in the
Middle East as ally Israel pounded Gaza and clashes on its border with
Lebanon intensified.
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The German share price index DAX graph is pictured at the stock
exchange in Frankfurt, Germany, October 20, 2023. REUTERS/Staff/File
Photo
GROWTH SURGE
Mega caps Microsoft, Alphabet, Amazon and Meta Platforms all report
earnings this week. IBM and Intel are also on the docket.
Profits should be supported by the strength of consumer demand with
figures on U.S. gross domestic product this week expected to show
annualized growth of a heady 4.2% in the third quarter, and nominal
annualized growth possibly as high as 7%.
This U.S. outperformance has underpinned the dollar, though the
threat of Japanese intervention has capped it at around 150.00 yen,
at least for the moment. The dollar was last trading at 149.93 yen,
just below the recent peak of 150.16.
Yields in Japan were also on the rise on speculation the Bank of
Japan was discussing a further tweak to its yield curve control
policy, which might be announced at its policy meeting on Oct. 31.
The euro rose 0.17% to $1.0613, while the Swiss franc, which has
benefited from safe-haven flows over the past couple of weeks, held
steady at 0.8928 per dollar, and was a touch weaker on the common
currency at 0.94715 per euro.
The ECB meets later this week and is fully expected to leave
interest rates unchanged at 4%. Investors will be looking for any
kind of signal from ECB President Christine Lagarde about how the
recent rise in global bond yields might affect the outlook for euro
zone monetary policy.
"Given the further up-shift in yields we've had of late, the
geopolitical events since the last meeting, I think we'll want to
wait and see what her tone is and whether she's still got a
tightening bias at the margin," Daiwa's Scicluna said.
Gold, which hit its highest since May last week thanks also to
safe-haven inflows, was flat at $1,980 an ounce. [GOL/]
Oil prices recovered from earlier losses, with investors continuing
to focus on the situation in the Middle East.
Brent crude was flat at to $92.21 a barrel, while U.S. crude was at
$87.97.
(Reporting by Wayne Cole; Editing by Shri Navaratnam, Simon
Cameron-Moore, Susan Fenton and Ed Osmond)
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