Bond prices and equities fell as investors prepared for another large interest rate increase from the Fed to restrain inflation, at the risk of tipping the economy into recession.
Bond prices and equities fell on Wednesday as investors prepared for another large interest rate increase from the US Federal Reserve, and the prospect of more to come,The two-year US Treasury yield continued its inexorable ascent to reach 3.
99 per cent, the highest in nearly 15 years, before steadying at 3.96 per cent. The 10-year rate shot up to its highest in more than a decade at 3.6 per cent, before retreating to 3.56 per cent. US 10-year yields topped 3.5 per cent for the first time in 11 years on Monday. The closely watched gap between two- and 10-year US yields widened to minus 47.5 basis points. The two- and 10-year yield curve inversion, where the short-end rate is higher than the long-end, is a reliable predictor of recession. Investor jitteriness about the health of the global economy was reflected in the safe haven US dollar. The Australian dollar tapped its lowest level since June 2020 at US66.67¢, having shed more than US2¢ in one week. The local currency pared back losses to US66.75¢ later.About 80 central banks are tightening monetary policy, often in lofty increments, to repel galloping inflation.Sweden’s central bank was the latest; on Tuesday, it lifted interest rates by a surprise full percentage point to 1.75 per cent and warned of more to come over the next six months. Inflation in Sweden hit a 30-year peak of 9 per cent in August as the effects of soaring energy prices spread through the economy. The central bank projects a peak cash rate of 2.5 per cent, up from about 2 per cent at its June meeting, in the second quarter of next year. The US Federal Reserve is under pressure to back up its hawkishness at the end of its two-day policy meeting on Wednesday . Fed rate futures are fully priced for a third 0.75 percentage point increase with a small chance of a full percentage point move. “It’s more than likely that we have a decent recession next year both here and globally,” said Angus Coote, head of investments at Jamieson Coote Bonds. “You cannot hike rates like they have and will continue to and expect there to be no consequences – I fully expect something to break soon.”The US economy may not be in a recession yet, according to the Commonwealth Bank, but will be within two years. “History shows a Fed tightening cycle does not always induce a recession, but neither does the Fed have a good track record,” said Carol Kong, a strategist in CBA’s international economics team. “‘Soft landings’, or bringing inflation down without triggering a recession, are rare in the US.”Tighter monetary policy is setting new milestones in debt offering protection against inflation. The break-even rate, a market-based measure of projected inflation on five- and 10-year US Treasury Inflation Protected Securities, or TIPS, surged to the highest in at least 12 years, reflecting a growing fear that policymakers have let economies run too hot.The Swiss National Bank is likely to follow suit with aggressive increases.Investors are split over whether the Bank of England will lift its benchmark by 0.5 percentage points or 0.75 percentage points. The Bank of Japan is widely expected to keep its ultra-easy stimulus settings unchanged – including pinning the 10-year yield near zero – to support a fragile economic recovery. Interbank futures are fully priced for a 0.25 percentage point lift by the Reserve Bank in October and imply a 58 per cent chance of a fifth consecutive 0.5 percentage point move.
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