US Treasury yields climb as investors fret over interest rate rises

Stocks fell and government bond yields rose in the US and Europe on Tuesday after further evidence that some of the world’s biggest economies were more robust than expected, raising concerns that central banks would further increase interest rates to tame inflation.

The blue-chip S&P 500 fell 1.2 per cent while the Nasdaq Composite slid 1.5 per cent in New York after a closely watched survey of US business activity was far stronger than expected.

The US S&P Global composite purchasing managers’ index reading of 50.2 was an eight-month high and ahead of market expectations of 47.5. That was mirrored by other bullish readings in the eurozone earlier in the day. A level above 50 indicates industry growth.

The US survey provided further indications of the health of the economy following bumper payrolls and retail sales data in recent weeks. Investors have been repricing global stocks lower and bond yields higher in expectations that central banks will keep rates higher for longer to curb inflation.

“Expectations of rate cuts later in the year were never very realistic,” said Michael Metcalfe, head of macro strategy at State Street Global Markets. “There was an assumption that tightening would start to limit growth, and now people seem to have flipped from expecting a recession to a boom in a short period of time, based on a few releases which granted all say the same thing.”

The yield on the two-year Treasury note, which is most sensitive to interest rate changes, rose 0.08 percentage points to 4.7 per cent, its highest level of the year and at levels last seen in 2007. The yield on the 10-year rose 0.09 percentage points to its highest level since early November.

In Europe the benchmark Stoxx 600 fell 0.3 per cent and Germany’s was down 0.4 per cent after the S&P surveys for the eurozone also indicated private sector activity in the bloc was better than expected.

Investors are now more focused on interest rates than the prospect of stronger profits because of robust economic activity, according to Neil Birrell, chief investment officer at asset manager Premier Miton. “People thought the end was in sight and there was some certainty, but every time we get a number like [the European] it worries investors,” he said.

The yield on the 10-year German Bund rose 0.09 percentage points to 2.55 per cent, closing to its highest point since the eurozone debt crisis in the summer of 2011.

ECB governing council member Olli Rehn said on Monday that rates would peak during the summer, but that inflation was “excessively high”.

“With inflation so high, further rate hikes beyond March seem likely, logical and appropriate . . . I assume that we will reach the ‘terminal rate’ in the course of the summer,” he said.

Brent crude fell 1.8 per cent to $82.65 a barrel, while the US equivalent WTI lost 0.5 per cent to $75.97.

The dollar index, which measures the greenback against a basket of six peer currencies, was flat.

In Asia, the Hang Seng index fell 1.7 per cent, while China’s CSI 300 gained 0.3 per cent after rising 2.45 per cent on Monday, its best one-day performance since late November. The index has risen 6.6 per cent this year.