Government bond yields are having a profound effect on the economy, fueling mortgage rates and corporate borrowing costs. The higher yield, which rises as bond prices fall, tightens economic conditions two years after the coronavirus pandemic. The 10-year U.S. yield rose just over 3% in early afternoon trading in New York, according to Bloomberg data – doubled at the beginning of the year and the highest since December 2018. Later fell to 2.99 percent, increased by 0.05 percentage points per day. Yields have risen this year as the Fed takes action to try to curb US inflation, which reached 8.5% year-on-year in March – its fastest growth rate in 40 years. The combination of high inflation and weakening global economic outlook – the US economy shrank 1.4% year-on-year in the first quarter – has raised questions about how much the Fed will be able to raise interest rates without putting too much strain on the economy. Alex Roever, a strategic US rate analyst at JPMorgan, said the Fed was facing “gross uncertainty”, including rising labor costs, supply chain problems and commodity prices that have soared since the Russian invasion of Ukraine. “While it is clear that this economy does not need an encouraging monetary policy, what is less clear is the speed at which this incentive should be removed and the reasons why this speed is chosen,” he added. The Fed is widely expected to announce an extremely large half-percentage point increase in interest rates at the end of its policy session on Wednesday, May, and futures markets are pricing similar half-point increases in the next two sessions. US short-term interest rates are now expected to be close to 2.5 percent by the end of 2022, from the current range of 0.25 to 0.5 percent. As investors prepare for higher interest rates, there are signs of pressure on national economies. Surveys released by the industry over the weekend showed that activity in China’s large-scale factory sector shrank last month at the fastest pace since February 2020, as the country’s economy is dragged down by lockdowns due to the coronavirus. At the same time, the indicators of market managers released on Monday showed a slowdown in the growth of activity in the euro area sector and factories in the US. The rapid rise in bond yields this year has weighed on stock markets, reducing the attractiveness of more risky investments, and the combination of higher interest rates and bleak economic data hit stocks earlier in the day. However, US stock indices closed higher as investors took advantage of recent fluctuations to “buy the dive”. The tech-savvy Nasdaq Composite, which suffered its worst monthly drop since the global financial crisis in 2008, rose 1.6% in April. The broader S&P 500 index closed 0.6% higher, having fallen up to 1.7% earlier in the afternoon. In Europe, meanwhile, the Stoxx 600 regional index fell as much as 3 percent before reducing its trading losses to 1.5 percent lower. The initial fall of the regional meter reflected brief – but sharp – falls for the Nordic meters, including the Swedish OMX 30 benchmark, which fell as much as 7.9 percent before recovering to close 1.9 percent lower. A trader attributed the move to Citigroup confusing a trading of a stock basket containing many Swedish names. Citi declined to comment. Rising government bond yields helped the dollar index, which measures the US currency against a basket of six others, gain 0.7 percent to a new 20-year high.
