Stocks sink as bond sell-off fuels jitters

People pass the New York Stock Exchange on Wednesday in New York. Wall Street was poised to open with losses as some major dealmaking and a handful of earnings reports fill the news void until Friday's latest inflation report. Photo / Peter Morgan, AP

A global bond sell-off intensified on Wednesday and prompted a stock retreat as well, following the latest in a series of US Treasury auctions to receive a lukewarm reception from investors.

An auction for $44 billion (NZ$71.9b) of new seven-year Treasury notes in the early afternoon was met with tepid interest from buyers, the third weak US government bond auction in two days.

Auction sizes were increased earlier this year and investors and analysts have since warned about the market’s capacity to absorb the deluge of new supply.

Treasury yields broadly rose to their highest levels in a month following the seven-year auction, building on a sell-off that had started the day before in the wake of weak two- and five-year auctions.

The benchmark 10-year Treasury yield rose to a peak of 4.64 per cent, its highest level since early May. Bond yields rise as prices fall.

Stocks had sold off earlier in the day, though the auction ultimately had little effect on the main Wall Street indices. The S&P 500 was down 0.5 per cent in mid-afternoon, while the Nasdaq Composite was down 0.2 per cent.

European stocks were more downbeat. London’s FTSE 100 shed 0.7 per cent, France’s Cac 40 lost 1.5 per cent and Germany’s Dax fell 1.1 per cent. The region-wide Stoxx 600 fell 1 per cent.

The equity and bond market moves came after the release of strong consumer confidence data on Tuesday — which lowered expectations of interest rate cuts in the near future.

Hawkish comments from Minneapolis Federal Reserve President Neel Kashkari fanned the sell-off as traders looked ahead to Friday’s release of the US Federal Reserve’s preferred inflation gauge. “I don’t think anybody has totally taken rate increases off the table,” Kashkari said on Tuesday.

“Blame bond yields” for the stock market slide, said Chris Turner, a currency strategist at ING.

Soft Treasury auctions and higher than expected Australian inflation overnight had pushed longer-dated global bond yields higher, all of which eventually proved “a headwind to equities,” he said.

Analysts at Royal Bank of Canada said “yesterday’s [US Treasury] weakness, spurred by weak auction results...continued overnight” and “weighed on equities”.

Yields on 10-year German bonds rose 0.10 percentage points to 2.69 per cent, the highest level since November.

Data published on Wednesday showed German inflation picked up more than forecast to a four-month high owing to an acceleration of services prices.

German wages rose 6.4 per cent in the first quarter, separate data showed, giving workers in Europe’s largest economy their biggest real-terms pay rise after inflation since records began in 2008.

Investors turned to energy stocks even as prices for Brent crude, the international oil benchmark, slipped 0.6 per cent to $83.70 a barrel. Among the Stoxx 600′s 20 constituent sectors, only energy rallied on the day, up 0.3 per cent.

The “global trend of risk-off” in equity and bond markets has left companies tied to in-demand commodities as the “only safe havens”, JPMorgan analysts said in a note to clients on Wednesday.

The US dollar index, a measure of the dollar’s strength against a basket of six other currencies, was up 0.4 per cent.

Sterling, meanwhile, rose to a 21-month high against the euro as traders backed away from bets on imminent Bank of England rate cuts.

Written by: George Steer in London and Kate Duguid in New York

© Financial Times