European equities soften while Treasuries steady after sell-off

Biden’s promise to ‘go big’ on stimulus breathes fresh life into reflation trade

European stock markets softened on Wednesday and government bond markets steadied after a sell-off that drove Treasury yields to their highest in a year.

During a live CNN broadcast on Tuesday, US president Joe Biden pledged that his $1.9 trillion (€1.6 trillion) coronavirus relief plan, which is awaiting congressional approval, would create 7m jobs this year. “Now’s the time to go big,” Mr Biden said.

That added fresh momentum to the sell-off in government debt since the election in November. Prospects of a stimulus-fuelled recovery in the world’s biggest economy have fed expectations of higher inflation that erodes the value of bond coupons.

The 10-year US Treasury yield crossed above 1.3 per cent in intraday trading on Tuesday as investors sold the debt, before recovering a little to 1.29 per cent by Wednesday morning. The equivalent German bond yield was broadly flat at minus 0.35 per cent.

The government bond sell-off has given equity investors pause for thought, not least because a move higher in bond yields increases their attraction, relative to stock dividends, for new investors. The regional Stoxx 600 equity index lost 0.3 per cent in early trades, as did Germany’s Xetra Dax, while the UK’s FTSE 100 fell 0.2 per cent.

Equities have rallied since last March, when central banks responded to the pandemic by increasing their purchases of government bonds, sending 10-year Treasury yields beneath 0.5 per cent at their low.

Ahead of Mr Biden’s broadcast appearance on Tuesday, the US S&P 500 index and the FTSE All-World index hit fresh all-time highs before the rally faded out.

“Everyone was already very cautious on equities and talking about bubbles,” said Emiel van den Heiligenberg, head of asset allocation at Legal & General Investment Management. “So you can see the rise in [bond] yields is an excuse for a bit of a correction.”

Other investors believe bond yields and share prices can rise in tandem, powered by expectations of strong growth in the world’s largest economy.

“We remain positive on equities,” said Bastien Drut, senior strategist at CPR Asset Management, “because although bond yields have room to rise further, the rise in yields and the rise in equities are coming from the same place, which is economic growth.”

Futures markets signalled that the S&P and the top 100 stocks on the technology-focused Nasdaq Composite would trade flat at the New York opening bell.

The dollar, as measured against a basket of currencies, gained 0.3 per cent as investors retreated from stocks into the haven asset.

But oil prices continued their ascent, with international benchmark Brent crude rising 0.9 per cent to just shy of $64 a barrel. – Copyright The Financial Times Limited 2021