US Treasuries under pressure as traders assess monetary policy direction

US Treasuries were under pressure on Monday ahead of inflation data later in the week that may strengthen the case for tighter monetary policy in the world’s largest economy.

The yield on the 10-year Treasury note rose by as much as 0.04 percentage points to 1.805 per cent, its highest since January 2020, as the price of the debt fell to reflect anticipated increases in interest rates and inflation that make fixed-income securities less appealing.

This key debt yield, which underpins companies’ borrowing costs worldwide, has climbed from about 1.53 per cent at the start of the year.

In equity markets, Europe’s regional Stoxx 600 share index dropped 0.2 per cent, as investors retreated from highly valued technology shares that are sensitive to prospects of better returns from cash and other assets perceived to be lower risk, while buying up energy stocks that pay generous dividends.

London’s FTSE 100 fell 0.1 per cent and futures markets tipped Wall Street’s broad-based S&P 500 share gauge to rise 0.1 per cent.

This followed a turbulent week across global financial markets after minutes from the US Federal Reserve’s latest meeting and an unexpectedly strong jobs report increased expectations of the world’s most influential central bank rapidly winding down its pandemic-era stimulus and raising borrowing costs.

Inflation data for the US on Wednesday is expected to show consumer prices rose at an annual pace of 7 per cent last month, according to a Reuters poll, up from 6.8 per cent in November and far exceeding the Fed’s average 2 per cent target. Inflation in the eurozone hit a record 5 per cent in December, piling pressure on the European Central Bank to speed up the withdrawal of its own emergency asset purchase programme.

Strategists at Goldman Sachs expect the Fed to raise rates four times this year, after tethering them close to zero in March 2020 to insulate markets and the economy from the shocks of coronavirus, in a move that pulled down businesses’ funding costs and boosted global stocks.

“We continue to see hikes in March, June, and September, and have now added a hike in December for a total of four in 2022,” Goldman’s Jan Hatzius said in a note to clients.

“Declining labor market slack has made Fed officials more sensitive to upside inflation risks and less sensitive to downside growth risks.”

In Asia, Chinese tech stocks gained on Monday. Hong Kong’s Hang Seng Tech index gained as much as 2.5 per cent, with Alibaba Health Information Technology gaining as much as 14 per cent and short video platform Kuaishou’s Hong Kong-listed shares rising 12.2 per cent.

The sub-index lost almost 3 per cent last week as traders around the world sold tech stocks in anticipation of rate increases from the Fed.

Additional reporting by William Langley in Hong Kong

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