Treasury yields rise after Fed minutes show inflation concern

Stock markets whipsawed while a sell-off in US government bonds continued on Wednesday afternoon after minutes from the Federal Reserve’s most recent meeting warned that the central bank could move to a “more restrictive” monetary policy to fight inflation.

The Fed last month raised its benchmark interest rate by 0.75 percentage points, the largest increase in almost 30 years, in an attempt to tame price rises. Minutes from the monetary policy committee meeting released on Wednesday said Fed officials were concerned that inflation “could become entrenched if the public began to question the resolve of the committee”.

The yield on the benchmark 10-year Treasury note, which rises when prices fall, gained 0.12 percentage points to 2.93 per cent, having climbed about 0.09 percentage points earlier in the day.

Options markets showed a slight increase in expectations for how high interest rates will climb by the end of the year.

Markets have been pressured this year by worries that central banks’ efforts to rein in inflation will tamp down on demand, potentially pushing economies into recession.

The 10-year Treasury yield fell below the two-year on Tuesday. Such a pattern — known as an inverted yield curve — is often seen as a warning sign of an impending recession, and the gap between two notes widened further on Wednesday.

The S&P 500 stock index dipped in the immediate aftermath of the release of the Fed minutes, before jumping as much as 1 per cent and closing 0.4 per cent higher. The tech-heavy Nasdaq Composite also closed 0.4 per cent higher.

Commodity and currency markets also highlighted growing recession fears on Wednesday, with Brent crude — the international oil benchmark — momentarily falling below $100 a barrel.

Brent settled 2 per cent lower at $100.69 a barrel. US marker West Texas Intermediate slid 1 per cent to $98.53 a barrel, having dropped to less than $100 in the previous session.

The euro also extended its recent losses, slumping as much as 1 per cent against the dollar to $1.016 — a move that took the common currency to less than $1.02 for the first time in two decades.

The dollar index, which measures the US currency against a basket of six others and which tends to strengthen during times of uncertainty, added a further 0.5 per cent after a strong rally on Tuesday.

“Continued [Federal Reserve] tightening amidst a global slowdown remains a very positive environment for the dollar,” wrote analysts at ING, who added that such an environment could lead the dollar index to “trade some 2 per cent higher, meaning that EUR/USD looks likely to drift towards parity this month”.

“1.00 is probably the biggest psychological level around in FX,” said ING, “and fireworks look likely” when it happens.

Data compiled by Nick Colas, co-founder of DataTrek Research, showed that dollar peaks correlated with the exact days of lows for the S&P 500 in 2009 and 2020.

“The dollar has given useful information at prior major US large-cap equity lows,” he said. “The fact that it continues to strengthen versus the euro, pound and other currencies tells us to expect further US equity volatility.”

Europe’s Stoxx 600 share gauge rallied 1.7 per cent on Wednesday, pushed higher by a sharp rise in the shares of Just Eat Takeaway after Amazon agreed to take a 2 per cent stake in the company’s Grubhub arm, and by stronger-than-expected German industrial data.

In Asian equity markets, Hong Kong’s Hang Seng lost 1.2 per cent as new Covid-19 outbreaks compounded recession worries.