US government bonds dip as investors await Fed signals

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US government bonds weakened on Wednesday as investors remained on alert for signals of changes to the Federal Reserve’s supportive monetary policy stance at the conclusion of its latest meeting.

The yield on the 10-year US Treasury bond, which influences borrowing costs worldwide, rose 0.02 percentage points to 1.641 per cent by the early afternoon after the US central bank announced its decision to keep interest rates on hold.

Economists expect Federal Reserve chair Jay Powell, in his post-meeting press conference, to reiterate the need for supportive monetary policy until the US labour market recovers from the pandemic. But this was becoming “a trickier message for the Fed to manage”, said Morgan Stanley strategist Andrew Sheets, following sharp rebounds in employment and retail sales.

“It feels way too early for the Fed to shift its monetary policy outlook,” said Salman Ahmed, global head of macro and strategic asset allocation at Fidelity. “This is certainly a risk for the second half of the year” when the Fed may start “hinting” at reducing its $120bn in monthly bond purchases that had boosted financial markets since March last year, Ahmed added.

While investors herded out of US Treasuries in the first three months of this year, pulling the 10-year yield up from about 0.9 per cent at the start of 2021, the selling of European bonds during that period was more muted.

But analysts at RBC said that, as the outlook for the global economy brightened, eurozone bonds could be harder hit this time.

“The vaccination drive on the continent of Europe is gathering pace and thus a key component of worries for the economic opening is likely to fall by the wayside soon,” said Peter Schaffrik, global macro strategist at the Canadian bank.

The Bund yield, which has been negative for almost two years, could be heading back to zero, Gavekal analysts Nick Andrews and Cedric Gemehl wrote in a research note. Some believe the European Central Bank, which has bought €1.9tn worth of eurozone government bonds to suppress borrowing costs, would not let this happen.

“The ECB’s stance is clearly to limit rises in government bond yields and borrowing costs,” said Sophie Chardon, cross-asset strategist at Lombard Odier.

In stock markets, the blue-chip S&P 500 index was essentially flat by the early afternoon, and the technology-focused Nasdaq Composite was down 0.1 per cent as equity investors awaited words from Powell and quarterly results from Apple and Facebook later in the day. Both Wall Street indices reached all-time highs in recent days.

Europe’s Stoxx 600 index, which hit a record on April 19, closed flat.

Brent crude rose 1.2 per cent to $67.22 a barrel, helping the natural resources-heavy FTSE 100 to close 0.3 per cent higher. The dollar index, which tracks the greenback against a basket of trading partners’ currencies, dipped 0.1 per cent, remaining around its weakest point since early March.

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