Global stock and government bond prices rose on Wednesday, with the sovereign debt market rebounding from a sell-off earlier in the week that had been driven by concerns about tighter monetary policy.
Government bond yields, which fall when prices rise, on both sides of the Atlantic hit multiyear highs this week as the Federal Reserve, Bank of England and European Central Bank all move closer to normalising monetary policy after years of extraordinary stimulus.
However, the sell-off paused on Wednesday, with yields falling across developed markets. The yield on the 10-year US Treasury dropped 0.02 percentage points to 1.95 per cent, while Germany’s 10-year Bund fell 0.05 percentage points to 0.21 per cent.
The yield on Italy’s 10-year bond, which is seen as particularly sensitive to rising rates due to the government’s high debt levels, dropped 0.1 percentage points to 1.75 per cent.
The brighter mood was also reflected across stock markets, with the big indices across the US, Europe and Asia registering solid gains.
Wall Street’s benchmark S&P 500 rose 1.5 per cent, with stocks across every sector rising. The technology dominated Nasdaq Composite climbed 2.1 per cent.
The Europe-wide Stoxx 600 index rose 1.7 per cent. Italian assets again performed particularly well, with the FTSE MIB rising 2.7 per cent.
Tech stocks are seen as particularly vulnerable to rising bond yields, which reduce the valuation investors put on their future earnings. However, with the Nasdaq already down about 7 per cent in 2022, sessions when bond yields decline have prompted bargain hunting in the sector. Shares in Google owner Alphabet rose 1.6 per cent, while Facebook owner Meta — which plunged last week following disappointing earnings — gained more than 5 per cent.
“When equity market sentiment has been very poor for a while, sometimes there is a feeling things can’t get any worse,” said Guillaume Paillat, multi-asset portfolio manager at Aviva Investors.
“There’s been a sense of looking for the entry point to buy back into mega-cap tech,” he said. “Although, as it is going to be a choppy environment driven by rates for a while, I’m not all in.”
Money markets have priced in more than five quarter-point rate rises by the Fed this year, in response to surging inflation. Data on Thursday are expected to show US consumer prices climbed to 7.2 per cent in the year to January, a four-decade high.
Optimism is building that price rises, fuelled by global supply chain issues and surging energy costs, have peaked. Stock markets have swung heavily in recent weeks, however, as investors struggle to forecast where bond yields and interest rates will settle.
“Everyone understands inflation is coming down but we don’t know by how much,” said Caroline Simmons, UK chief investment officer at UBS’s private bank. “This is what unnerves people.”
The S&P 500 is down 4 per cent for 2022 and has moved more than 1 per cent in either direction on a third of trading days this year.
Bets on the European Central Bank tightening monetary policy rose last week when its president Christine Lagarde expressed concern about record eurozone inflation and declined to rule out interest rate rises. François Villeroy de Galhau, Bank of France governor, said on Tuesday, however, that markets may have overreacted to Lagarde’s comment.
Brent crude, the international oil benchmark, rose 0.8 per cent to $91.55 a barrel, remaining close to its highest level since October 2014.
