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Wall Street set to struggle as bond rumblings return

18 March 2021 19:17 (UTC +04:00)

World share markets edged higher on Thursday after the U.S. Federal Reserve promised to keep its support in place, though lower Wall Street futures and another rise in global bond yields and the dollar showed not everyone was convinced, APA reports citing Reuters.

MSCI’s 50-country world index was near record highs after the Fed had also predicted bumper U.S. growth this year, and a jump in German car shares hoisted Germany’s DAX to a new all-time peak in Europe.

For traders worried about it all being snuffed out by rising borrowing costs, though, euro zone government bond yields were tracking upward moves in benchmark 10-year U.S. Treasuries as they climbed to a 14-month high of 1.75%.

That also revitalised the dollar, which had briefly dropped to a two-week low after the Fed had pushed back against speculation it could be starting to think about interest rate hikes.

The U.S. central bank sees the economy growing 6.5% this year, which would be the largest jump since 1984. Inflation is expected to exceed its preferred level of 2% to 2.4%, although it is expected to drop back in subsequent years.

“I don’t know what the Fed can do to stop a rise in yields that is based on stronger fundamentals,” said BCA chief global fixed income strategist Rob Robis, pointing to the $1.9 trillion U.S. coronavirus relief package that will drive growth.

“The path of least resistance is still towards higher yields,” he said. “The U.S. Treasury market leads the world and every bond market responds.”

It was another jam-packed day of central bank action on Thursday too.

Norway signalled a rate hike was possible this year. There were reports of the Bank of Japan loosening its tight grip on yields, the Bank of England said it was seeing recovery signs while Turkey jacked up its rates to 19% after another torrid month for the lira.

The dollar index, which measures the greenback against a basket of its peers, rose as much as 0.4% to 91.761. It had dropped to 91.300 after Wednesday’s Fed meeting.

That pulled the euro back to $1.1915 from a one-week high of $1.19900. Sterling dribbled lower after the BoE statement, Norway’s crown reached its strongest against the euro in 13 months, and the dollar gained 0.3% to 109.180 yen.

“The question remains whether the Fed can actually arrest the latest spike in U.S. Treasury yields, especially given that the improvement of U.S. fundamentals will continue,” said Valentin Marinov, head of G10 FX research at Credit Agricole in London. “The renewed spike of UST yields should continue to support the dollar versus low-yielders like the euro, yen and the Swiss franc.”