The 2-year yield climbed amid expectations of Fed tightening, rising to a top of 1.1920% in morning trade in Asia, a level last reached in February 2020
Asian shares tumbled to their lowest in nearly 15 months and short-term U.S. yields rose to 23-month highs on Thursday after the Federal Reserve’s chairman signalled plans to steadily tighten policy.
In its latest policy update on Wednesday, the Fed indicated it is likely to raise U.S. interest rates in March, as has been widely expected, and reaffirmed plans to end its bond purchases that month before launching a significant reduction in its asset holdings.
But in the follow-up press conference, Powell warned that inflation remains above the Fed’s long-run goal and supply chain issues may be more persistent than previously thought.
There was a marked shift in terms of a relatively dovish statement and then a relatively hawkish press conference, said David Chao, global market strategist, Asia Pacific (ex-Japan) at Invesco.
Powell is not committing to the size or the frequency of rate hikes and also the timing of the balance sheet reduction. I think that buys him a bit of wiggle room as to how quickly and with what velocity he wants to normalise monetary policy in the U.S. It’s very data dependent and so we’re certainly watching other economic data that’s going to be released especially inflation data, inflation expectations data, which I think could trigger more aggressive monetary policy tightening.
Fed funds futures showed traders pricing in as many as five hikes by December, after previously fully pricing for four increases.
Concerns that the Fed will increasingly prioritise fighting inflation walloped share markets. MSCI’s broad gauge of regional markets outside Japan dropped more than 2% on Thursday to its lowest level since Nov. 5, 2020.
Hong Kong’s Hang Seng index and Australian shares dropped more than 2% and Chinese blue-chips declined to their lowest level since Sept. 30, 2020 as Refinitiv flows data pointed to heavy selling by foreign investors through the country’s Stock Connect scheme.
In Tokyo, the Nikkei shed more than 2.5%, hitting its lowest point since Nov. 26, 2020.
The policy-sensitive U.S. 2-year yield climbed amid expectations of Fed tightening, rising to a top of 1.1920% in morning trade in Asia, a level last reached in February 2020. The benchmark 10-year yield also ticked up from Wednesday’s close, rising to 1.8566% from 1.846%.