Government debt hit as traders weigh prospect of new sanctions on Russia

U.S. and eurozone government debt sold off on Tuesday as traders weighed the prospect of tougher sanctions on Russia and comments from a senior Federal Reserve policymaker who signaled that the central bank act more aggressively to curb inflation.

The yield on the 10-year US Treasury note, which moves inversely to its price and is a benchmark for borrowing costs around the world, climbed 0.16 percentage points to 2.56%, its highest level since May 2019. The yield on the two-year note jumped 0.08 percentage points to 2.5 percent.

The U.S. selloff was exacerbated by comments from Federal Reserve Governor Lael Brainard, who said on Tuesday she expected the central bank to begin a “rapid” reduction in its balance sheet to tighten its grip. Politics.

The German 10-year Bund rose 0.11 percentage points to 0.61%, and the equivalent Italian bond yield rose 0.19 percentage points to 2.26%. The UK 10-year gilt yield rose 0.11 percentage points to 1.65%.

Brussels has said it is ready to launch a fifth sanctions package against Russia, which would include a ban on coal imports from the country. Restrictions on oil imports are being considered, although they are not expected to be included in this week’s package.

On Monday, the United States and France had called for a significant escalation of punitive measures against Russia, following reports of atrocities committed by its forces in Ukraine. Joe Biden, US President, said he would “continue to add more sanctions” against Russia and proposed a trial to assess possible war crimes.

Coal futures for April rose 15% in New York afternoon Tuesday to $296 a tonne. Oil prices fell slightly, with Brent, the international benchmark, down 0.3% to $107.20 a barrel.

Altaf Kassam, head of investment strategy and research for the Emea region at State Street Global Advisors, attributed the sale of government debt on Tuesday to a combination of rising Fed policy, high inflation and the growing likelihood of a protracted war in Ukraine.

The emergence of Marine Le Pen as a serious contender against Emmanuel Macron in the French presidential elections has also unsettled investors, he said. “We feel the race there is much tighter now. . . French political risk is at the forefront.

“None of these factors are good for stock markets,” Kassam added, “but they are worse for bonds.”

Supply chain disruptions caused by Russia’s invasion of Ukraine have heightened concerns about persistently high levels of global inflation.

Data released on Tuesday showed that rising energy and food prices pushed inflation to its highest level in 30 years in February in the group of wealthy OECD countries. The annual rate of consumer prices in the 38 member countries increased by 7.7%, against 1.7% the previous year.

In equity markets, the U.S. benchmark S&P 500 was down 0.9% by mid-afternoon, while the tech-heavy Nasdaq Composite fell 2%, undoing more than winnings from the previous session. Europe’s Stoxx 600 index closed 0.2% higher, while Germany’s Dax slipped 0.6%.

Tancredi Cordero, founder of Kuros Associates, said that the German economy “in particular will see its average input costs, with respect to energy and raw materials, increase significantly, which will reduce operating margins by most national companies”.

“I don’t think there will be a recession [in Germany], it’s too strong an economy,” he added. “But in the short term, Germany will be reduced in terms of exposure by institutional investors.”

Elsewhere, Japan’s Nikkei 225 stock index closed up 0.2%. Markets in China and Hong Kong were closed on Tuesday for a public holiday.

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