US Treasuries fell sharply and yields rose as Alan Greenspan, chairman of the Federal Reserve, painted an upbeat economic picture in testimony to the US Congress on Wednesday morning.
“Our baseline outlook for the US economy is one of sustained economic growth and contained inflation pressures,” Mr Greenspan said. “Realising this outcome will require the Federal Reserve to continue to remove monetary accommodation.”
Further hikes in short-term interest rates had been widely anticipated. “I wouldn’t necessarily have expected the sell-off,” said Alan Ruskin of 4Cast, the economic consultancy. But he said bears could have been spurred by the fact that Mr Greenspan’s report contained “nothing bullish” for Treasuries as well as “clear and open-ended” statements about future rate rises.
The 10-year Treasury yield jumped 4.5 basis points to 4.228 per cent yesterday morning. The yield on the two-year note was 4.2bp higher at 3.902 per cent. And the 30-year bond yield was 4.461 per cent, up 3.6bp.
UK and eurozone government bonds fell and their yields climbed higher as Mr Greenspan’s remarks cast a shadow over all markets.
UK gilts shrugged off surprisingly dovish minutes from the Bank of England’s last interest rate-setting meeting. However, short sterling interest rate futures nudged higher on news that four of the nine monetary policy committee members had voted for a reduction. Don Smith, bond economist at ICAP, said the minutes revealed “the increased uncertainty that occurs within the committee when weak activity and higher inflation data coincide”.
Despite this, the prospect of further tightening in the US lifted yields. Two-year yields were up 3bp at 4.136 per cent with 10-year yields 1.7bp up at 4.341 per cent.
In the eurozone government bond market, where Germany increased the size of a 30-year bond issue, yields also rose. The German Finance Agency sold nearly €5bn of the bonds, attracting bids totalling 1.5 times the amount offered.
Thirty-year Bunds were yielding 3.811 per cent, up 2.7bp. Meanwhile, 10-year Bund yields were up 2.5bp at 3.296 per cent, while two-year yields added 2.3bp at 2.239 per cent.
Japanese government bond prices rose a touch, as traders speculated about another US interest rate rise. Yields on the benchmark 10-year bond fell half a basis point to 1.265 per cent.
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