Morning Bid: Bond bears get their claws out

2 minute read

The Federal Reserve building is seen before the Federal Reserve board is expected to signal plans to raise interest rates in March as it focuses on fighting inflation in Washington, U.S., January 26, 2022. REUTERS/Joshua Roberts/File Photo

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A look at the day ahead in markets from Sujata Rao

Treasury markets are in full-fledged selloff mode ahead of minutes from the Federal Reserve's March meeting.

With a half-point interest rate rise mostly baked in for May, the debate has moved on to whether the Fed could kick off balance sheet reduction next month as well.

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On Tuesday two normally dovish Fed officials, governor Lael Brainard and San Francisco Fed chief Mary Daly, precipitated a fresh Treasury selloff with suggestions the run-off might commence next month -- alongside a rate hike.

Ten-year Treasury yields have jumped to the highest in three years, up some 20 basis points since Friday. And with the Fed apparently poised to become even more aggressive on inflation, the 2-year/10-year Treasury curve has normalised, having been inverted for around a week .

What bears watching is the "real" or inflation adjusted Treasury yield, the variable that can determine how much sense it makes to invest in riskier assets such as stocks and emerging markets.

Ten-year real yields remain negative but at -0.26%, they are on their way back to zero, levels not seen since March 2020. Remember, they were below -1% at the start of this year.

On stocks, Tuesday's Nasdaq-led Wall Street selloff carried into Asia, pushing Japan's Nikkei 1.7% lower. Some stabilisation is creeping in however, with European shares marginally lower and U.S. equity futures flatlining.

Europe has other problems to contend with, and not just the prospect of economic recession caused by the Russia-Ukraine war. French markets have woken up to the possibility that the country's two-round presidential election (April 10 and 24) might yield a shock win for far-right candidate Marine Le Pen read more .

The euro has slipped to a one-month low versus the buoyant dollar. Further weakness may be bad news for the inflation outlook especially as factory inflation is likely to have topped 30% in March.

Key developments that should provide more direction to markets on Wednesday:

-China's services sector PMI hit hard by Omicron surge read more

-German industrial orders fell in Feb

-ECB speakers: Executive Board Philip R. Lane; ECB's Executive Board member Fabio Panetta; ECB's Executive Board member Isabel Schnabel; ECB Vice President Luis de Guindos

-Fed speakers: Philadelphia President Patrick Harker; San Francisco Fed president Mary Daly

-Polish central bank seen lifting rates by 50 bps

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Reporting by Sujata Rao; editing by Dhara Ranasinghe

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