Government bonds hold steady after Fed raises interest rates

US government bonds held steady and stock markets dipped on Wednesday afternoon after the Federal Reserve announced its first 0.5 percentage point interest rate rise in more than 20 years.

The yield on the 10-year US Treasury note, which acts as a benchmark for global borrowing costs, stood at 2.98 per cent shortly after the central bank’s announcement, up 0.03 percentage points for the day but slightly lower than it was immediately before the announcement. Bond yields rise when prices fall.

The more policy-sensitive two-year yield was flat for the day at 2.76 per cent, having climbed earlier in the day.

The tech-heavy Nasdaq Composite index slipped into negative territory after rising 0.3 per cent earlier in the afternoon, while the S&P 500 gave up some of its gains but remained 0.4 per cent higher for the day.

The muted initial reaction reflects the fact that the half-point rise was widely expected, with investors more focused on what guidance Fed chair Jay Powell will provide at his press conference later on Wednesday afternoon.

“There are some quite hawkish expectations for the Fed, including concerns in the market that they may open the door to 75 basis point [0.75 percentage point] rate rises in the future,” said Cosimo Marasciulo, head of fixed income absolute return at fund manager Amundi.

The annual pace of consumer price inflation in the US hit 8.5 per cent in March, as energy and food costs surged in response to Russia’s invasion of Ukraine. Eurozone inflation is running at a record high of 7.5 per cent.

The Fed’s update is the centrepiece of a busy week of central bank updates around the world, and government bond markets elsewhere were also under pressure on Wednesday.

Australia’s 10-year bond yield rose more than 0.2 percentage points to a high of 3.57 per cent on Wednesday, after the nation’s central bank on Tuesday lifted its main interest rate by a larger than expected 0.25 percentage points — its first such move in more than a decade.

“Australia started the gun on a week where we have more important central bank meetings,” said Brooks Macdonald’s chief investment officer Edward Park. “It was a firm reminder that bond markets can be caught off guard.” 

Germany’s 10-year Bund yield touched almost 1.04 per cent, later settling back to just under 1 per cent, after European Central Bank policymaker Isabel Schnabel told German publication Handelsblatt that a July rate rise was “possible”. 

Meanwhile, the yield on the 10-year Indian bond raced 0.26 percentage points higher to 7.4 per cent. The Reserve Bank of India on Wednesday announced a surprise 0.4 percentage point rate rise, the first increase in nearly four years.

The Bank of England is also expected to raise rates on Thursday.


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