Stocks fall and government bonds sell off on interest rate fears

Global stocks declined and government bonds sold off on Thursday as investors braced themselves for a longer period of higher interest rates.

Europe’s Stoxx 600 fell 0.6 per cent and London’s FTSE 100 lost 0.3 per cent ahead of the release of the eurozone’s February inflation figures, which are expected to show annual price growth of 8.2 per cent, down from 8.6 per cent in January.

However, stronger than expected inflation data from Germany, Spain and France this week suggests that February’s region-wide figure could also come in ahead of forecasts, which would ramp up the pressure on the European Central Bank to continue raising interest rates.

So-called core inflation, which excludes volatile energy and food prices, is likely to rise to a record high of about 5.5 per cent.

Yields on 10-year German government bonds are at their highest level since mid-2011 and added a further 0.04 percentage points on Thursday to reach 2.75 per cent. Bond yields move inversely to prices.

The moves come after a sobering few weeks for investors who had hoped central bank interest rates on both sides of the Atlantic were close to peaking.

Futures markets now indicate that the Federal Reserve’s main policy rate will hit 5.5 per cent in September, having anticipated at the start of February that borrowing costs would crest at just below 5 per cent. Investors are betting that the ECB will be forced to raise rates to all-time highs later this year on the back of strong service-sector activity and wage demands last month.

“Attitudes are in the dumps,” said Mike Zigmont, head of trading and research at Harvest Volatility Management. “We haven’t had a positive data point or headline in a while and the wait is weighing on both stocks and bonds.”

Contracts tracking Wall Street’s benchmark S&P 500 and those tracking the tech-heavy Nasdaq 100 fell 0.7 per cent and 0.9 per cent respectively ahead of the New York open.

US government bonds also sold off, with the yield on the two-year Treasury — the bond most sensitive to inflation — rising 0.01 percentage points to 4.9 per cent, its highest level since 2007. The yield on the benchmark 10-year Treasury rose 0.03 percentage points to 4.02 per cent.

Asian markets declined in early trading on Thursday as investors reassessed the optimism over China’s economic recovery that had buoyed equities to strong gains a day earlier. Hong Kong’s Hang Seng index lost 0.9 per cent while Japan’s Topix declined 0.2 per cent, as did China’s CSI 300.

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