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A global bond sell-off on Wednesday prompted stocks to retreat as lukewarm sales of US Treasuries weakened investor sentiment and investors worried anew about the impact of interest rates remaining higher for longer.
An early afternoon auction of $44bn in new seven-year Treasury notes met with only tepid buying interest, marking the third weak US government bond sale in two days. Auction sizes were increased earlier this year and investors and analysts have since warned about the market’s capacity to absorb the deluge of new supply.
Treasury yields broadly rose to their highest levels in a month following the seven-year auction, building on a sell-off that had started on Tuesday in the wake of weak two- and five-year auctions. The benchmark 10-year Treasury yield rose to a peak of 4.64 per cent, its highest level since early May. Bond yields rise as prices fall.
The weak mood helped stocks close near their lows for the session, giving the S&P 500 one of its worst days this month, down 0.74 per cent. The Nasdaq Composite ended off 0.58 per cent, having notched a new record high the day before.
“Dip buyers in both stocks and bonds remained sidelined as the price action offered no obvious incentive to get involved,” said Ian Lyngen, strategist at BMO Capital Markets, who said markets would remain jittery until investors got more clarity on the economy’s strength or the timing of the next interest rate move.
Most European stock markets were more downbeat. London’s FTSE 100 shed 0.7 per cent, France’s Cac 40 lost 1.5 per cent and Germany’s Dax fell 1.1 per cent. The region-wide Stoxx 600 fell 1 per cent.
The equity and bond market weakness came after the release of strong consumer confidence data on Tuesday — which lowered expectations of interest rate cuts in the near future.
Hawkish comments on Tuesday from Minneapolis Federal Reserve President Neel Kashkari also fanned the sell-off as traders looked ahead to Friday’s release of the US Federal Reserve’s preferred inflation gauge. “I don’t think anybody has totally taken rate increases off the table,” Kashkari said.
Yields on 10-year German bonds rose 0.10 percentage points to 2.69 per cent, the highest level since November.
Data published on Wednesday showed German inflation rose more than forecast to a four-month high owing to an acceleration of services prices. German wages rose 6.4 per cent in the first quarter, separate data showed, giving workers in Europe’s largest economy their biggest real-terms pay rise after inflation since records began in 2008.
Investors turned to energy stocks even as prices for Brent crude, the international oil benchmark, slipped 1 per cent to $83.35 a barrel. Among the Stoxx 600’s 20 constituent sectors, only energy rallied on the day, up 0.3 per cent.
The “global trend of risk-off” in equity and bond markets has left companies tied to in-demand commodities as the “only safe havens”, JPMorgan analysts said in a note to clients on Wednesday.
The US dollar index, a measure of the dollar’s strength against a basket of six other currencies, was up 0.5 per cent.
Sterling, meanwhile, rose to a 21-month high against the euro as traders backed away from bets on imminent Bank of England rate cuts.
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