US government bond prices slip lower as European stocks rise

10-year Treasury yield back above 2% ahead of Federal Reserve meeting

Global financial markets were mixed on Monday, with US government bond prices falling ahead of this week’s Federal Reserve’s monetary policy meeting, and European stocks rising on hopes of talks between Russia and Ukraine.

The yield on the 10-year US Treasury note, which moves inversely to the price of the benchmark government debt security and sets the tone for borrowing costs worldwide, rose 0.04 percentage points to 2.05 per cent, its highest since mid February.

In equity markets, the Stoxx Europe 600 share index, which has fallen more than a tenth so far this year as investors became increasingly concerned about sanctions against Russia choking off commodity supplies and causing recessions, added 0.5 per cent.

Shares

But elsewhere, shares in China fell on signs that widespread lockdowns could once again become commonplace as the world’s second-largest economy deals with its biggest Covid-19 outbreak since the start of the pandemic two years ago.

At its March 16-17 meeting, the Fed is widely expected to raise its main funds rate by a least a quarter point, having pinned it close to zero since the start of the coronavirus crisis two years ago, in a move that may influence other central banks to raise borrowing costs despite the economic risks of the Ukraine war.

Consumer price inflation in the US rose to an annual rate of 7.9 per cent in February, a fresh 40-year high, while price rises have also hit a record in the eurozone and are expected to exceed 7 per cent in the UK this spring.

"Chairman Jay Powell has signalled that the US Federal Reserve will start hiking rates with a 25 [basis point] move," analysts at research house Gavekal said in a note to clients.

“However, a 50bp hike cannot be ruled out as inflation and inflation expectations continue to soar.”

Hong Kong’s Hang Seng index fell 5.3 per cent and China’s CSI 300 index dropped 3.1 per cent after 17.5 million residents of Shenzhen were put under lockdown to contain a surge in cases of the Omicron coronavirus variant.

The measures followed on the heels of similar measures in Changchun, a city of 9 million in north-east China, with cases also rising in Shanghai and a number of other big cities.

China reported more than 1,800 cases of Covid-19 on Sunday, the most daily cases in two years, as authorities struggled to contain the country’s biggest outbreak since coronavirus emerged in Wuhan in 2020.

Lockdown

“If the lockdown is extended, China’s economic growth will be significantly affected,” said Raymond Yeung, chief economist for Greater China at ANZ. Yeung added that “half of China’s GDP and population will be impacted this time” and a one-week lockdown of the affected region could shave about 0.1 percentage points off the country’s economic growth this year.

The Hang Seng Tech index of large Chinese technology stocks down more than 11 per cent.

Oil benchmarks also dropped on hopes that Russia was more willing to engage in serious negotiations with Ukraine.

“If you compare the positions of both delegations at the talks at the start and now, then there has been substantial progress,” Leonid Slutsky, one of the Russian negotiators, said in an interview with RT Arabic, a Russian state-owned news channel.

Brent crude, the international benchmark, fell 3.3 per cent to $109 (€)a barrel and US marker West Texas Intermediate dropped 3.6 per cent to $105 following the signs of movement in talks.

“Oil prices continue to demonstrate volatility on the back of uncertain incremental supplies from outside of Russia, in addition to continuing geopolitical risk from the war,” said Kaushal Ramesh, senior analyst at Rystad Energy. – Copyright The Financial Times Limited 2022