US and eurozone government debt came under pressure on Tuesday as traders weighed the economic implications of an escalation of sanctions against Russia.
The yield on the 10-year US Treasury note — which moves inversely to its price and is a benchmark for borrowing costs worldwide — added 0.04 percentage points to 2.46 per cent. The yield on the two-year note remained slightly higher than that of the 10-year, in an “inversion” of the yield curve often seen as a precursor to recession.
The moves came as Brussels said a block on Russian coal exports would be part of an upcoming fifth sanctions package under discussion by EU member states. Restrictions on oil imports are being considered, though not expected as soon as this week’s package.
Eurozone sovereign bonds were also hit by a wave of selling, with the yield on Germany’s 10-year Bund adding 0.06 percentage points to 0.58 per cent and Italy’s equivalent bond yield rising 0.12 percentage points to 2.2 per cent. The UK’s 10-year gilt yield added 0.08 percentage points to 1.63 per cent.
On Monday, the US and France had called for a significant escalation of punitive measures against Russia, following reports of atrocities by its forces in Ukraine. US president Joe Biden said he would “continue to add more sanctions” on Russia and called for a trial to assess possible war crimes committed by Vladimir Putin’s forces.
“Markets are trying to price in the tail risk of energy sanctions against Russia but also making sure that they’re not caught offside should a ceasefire be agreed in relatively short order,” said Edward Park, chief investment officer at Brooks MacDonald. “I think we’re seeing a row back [in optimism] today.”
Coal futures for April were up more than 9 per cent on Tuesday at $287 a tonne. Oil prices also rose, with Brent crude, the international benchmark, adding 0.5 per cent to $108.1 a barrel.
Supply-chain disruptions sparked by Russia’s invasion of Ukraine in February have added to concerns about persistently high levels of global inflation, with analysts expecting central banks to tighten monetary policy further in response.
Data released on Tuesday showed that rising prices for energy and food pushed inflation to a 30-year high in February across the OECD group of rich countries. The annual rate of consumer prices across the 38 member countries advanced 7.7 per cent, up from 1.7 per cent a year before.
In equity markets, the US’s benchmark S&P 500 share gauge was broadly steady in early trade, while the technology-heavy Nasdaq Composite fell 0.6 per cent. Europe’s Stoxx 600 index moved between small gains and losses, while Germany’s Dax fell 0.5 per cent.
Tancredi Cordero, founder of Kuros Associates, said the German economy “in particular will see its average input costs, when it comes to energy and commodities, rising considerably, which will dent operating margins of most domestic companies”.
“I don’t think there will be a recession [in Germany], it’s too strong an economy,” he added. “But in the short term, Germany will be reduced in terms of exposure by institutional investors.”
If not a full-blown recession, Europe could instead be set for a prolonged bout of stagflation, said Florian Ielpo, multi-asset portfolio manager at Lombard Odier Investment Managers, referring to a period of simultaneous high inflation and muted economic growth.
Elsewhere in equity markets, Japan’s Nikkei 225 stock index closed 0.2 per cent higher, while the broader Topix index fell 0.2 per cent. Markets in China and Hong Kong were closed on Tuesday for a public holiday.
