Treasury yields and dollar rise as investors assess interest rate outlook

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The dollar climbed to a six-month high on Tuesday, while government bonds came under pressure, as investors weighed the future path of monetary policy and corporate debt issuance compounded market moves.

The dollar rose 0.6 per cent against a basket of six peer currencies, touching its highest level since March.

At the same time, the 10-year Treasury yield rose 0.1 percentage points to 4.27 per cent while the policy-sensitive two-year yield gained 0.09 percentage points to 4.96 per cent. Bond yields rise as their prices fall.

Investors pointed to expectations that US interest rates may need to stay “higher for longer” following signs of persistent economic resilience.

Christopher Waller, a top Federal Reserve official, signalled the US central bank was preparing to keep interest rates on hold at its policy meeting later this month, but also said recent data affirmed the likelihood of a so-called soft landing for the economy. The latter reduces the chances of rates being cut soon.

Market watchers also noted that the move in US government bonds may be reflective, in part, of the technical effects of corporate bond issuance following a rush of post-Labor Day borrowing — with companies hedging their deals in the Treasury market.

William O’Donnell, head of US rates strategy at Citigroup, said he thought Tuesday’s sell-off was a “direct consequence of, or spillover from Friday’s solid ISM Services print and the top line non-farm payroll number”.

Data last week showed that the US economy added 187,000 new jobs in August, the third straight month below 200,000. Market participants have been scrutinising labour market figures closely for clues about the future path of Fed policy.

But O’Donnell said that without factors including strike action in Hollywood, the figure could have been considerably higher.

“On top of that,” he added, “this four-day week will see an estimated $40bn to $60bn in investment-grade corporate supply . . . to go along with a pretty full supply calendar in Europe.”

The Labor Day week is seasonally strong for investment-grade debt issuance.

The moves in markets on Tuesday also followed weak economic data, including a survey showing that China’s service sector activity in August declined to its slowest rate since President Xi Jinping’s stringent coronavirus controls were lifted at the start of the year.

The Caixin services purchasing managers’ index came in at an eight-month low of 51.8 last month, down from 54.1 in July and below the 53.6 forecast of economists polled by Reuters. The reading approached the neutral 50 mark, which separates expansion from contraction.

In the eurozone, economic data also failed to match expectations, with the HCOB final Composite Purchasing Managers’ index falling to 46.7 in August, down from 48.6 in July, its lowest level since November 2020. The reading came in below the initial estimate of 47.

Adding to traders’ concerns over growth, oil prices jumped after Saudi Arabia announced it would extend its oil supply cut of 1mn barrels a day until the end of December.

The international benchmark Brent crude settled 1.2 per cent higher to a more than eight-month high of $90.04 a barrel after the announcement, while the US marker, West Texas Intermediate, rose 1.4 per cent to $86.71.

In equity markets, Wall Street’s benchmark S&P 500 closed 0.4 per cent lower while the tech-focused Nasdaq Composite lost 0.1 per cent.

The pan-European Stoxx Europe 600 closed 0.2 per cent lower, marking its fifth successive day of declines, while France’s Cac 40 and Germany’s Dax both fell 0.3 per cent.

In China, the benchmark CSI 300 dropped 0.7 per cent and Hong Kong’s Hang Seng was down 2.1 per cent, erasing most of the gains both indices made a day earlier after news of fresh government support for the property sector.

Shares in China’s troubled developer Country Garden fell 1 per cent, paring larger losses from earlier in the day, after the company narrowly avoided a default by making late payments on two dollar bonds within their grace periods.