On Monday, Treasury rates jumped the most in two days in decades, rattling global assets in one of the clearest indicators yet that the age of easy money is coming to an end. Even just a few days ago, global markets soared through milestones that appeared impossible. Three-year US Treasury yields rose, finishing the largest two-day increase since 1987. The S&P 500 entered a bear market after losing more than 20% from its January high. The gap between Italian and German benchmark rates, a major risk indicator in the eurozone, has widened to its biggest level since May 2020 and a measure of the currency hit its greatest level since the coronavirus pandemic began.
It all started with worse-than-expected US inflation data last week, which highlighted the Federal Reserve’s stark decision between fighting stubborn pricing pressures with aggressive interest-rate hikes or crashing the economy. This gained added significance on Monday with reports that the Federal Reserve could hike interest rates by 75 basis points as soon as this week, causing a global rebalancing from Sydney to New York.
Priya Misra, global head of rates strategy at TD Securities in New York, stated, “There are multiple cross-currents.” “The most serious problem is that central banks may be powerless to prevent a recession, which is a difficult message for markets to take.” Money markets now expect the Federal Reserve’s main overnight rate to reach 4% by the middle of next year, with a 50% likelihood of a three-quarter-point boost as early as this week. Short-term US Treasury rates led the curve upwards, with the three-year rising nearly 25 basis points to 3.49 percent on Monday, the highest level since 2007.
Meanwhile, a key portion of the US yield curve inverted, raising fears that tighter monetary policy may stifle the world’s largest economy’s growth. As the US afternoon progressed, the day’s movements became increasingly severe. By the end of the day, the S&P 500 had down 3.9 percent, with all 11 sectors ending in the red. At one time, every stock in the S&P 500 was in the red, with only five equities recovering to post gains by the conclusion of the day.
Outside of the United States, a key index of global equities has entered a bear market, and a measure of volatility in global foreign-exchange markets has risen to its highest level since 2020. Almost all of the 31 major currencies tracked by Bloomberg fell against the dollar, with commodity-linked currencies from Norway, New Zealand, and Australia leading losses among Group-of-10 peers; oil prices dipped, while copper fell.
After statistics revealed the economy deteriorated unexpectedly, the British pound sank to a two-year low versus the US dollar, as traders await the Bank of England policy announcement on Thursday. In other news, the Brazilian real, the developing world’s biggest loser on Monday, continued its longest losing run since July, falling to its lowest level since mid-May.
The dollar was nearly uniformly supported in foreign exchange moves. During the latest bout of volatility, investors have flocked to the US dollar as a safe haven, with the yen — another traditional safe haven in troubled times — hovering near a 20-year low versus the greenback. So far this year, the Bloomberg Dollar Spot Index has risen about 8%. The soaring dollar is the ‘Only Safe Haven Left,’ according to experts. After a period of high inflation in the United States,
“Right now, we have a strong directional view,” said Olga Yangon, Credit Agricole CIB’s head of emerging-market research and strategy. “We frequently discuss active currency selection, but today it’s more important than ever to get the direction right.” It’s about the dollar vs other currencies.”
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