US government bonds waver ahead of key Federal Reserve meeting

A key US government bond yield sat near the highest level since last February on Wednesday as investors awaited clues from the Federal Reserve about how it will deal with an expected surge in economic growth.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, added 0.01 percentage point to 1.634 per cent in European trading. This yield, which sets the tone for borrowing costs worldwide, has climbed rapidly from about 1.1 per cent at the start of February as markets anticipated a jolt of inflation from President Joe Biden’s $1.9tn stimulus and the rollout of coronavirus vaccines. So far, Fed chair Jay Powell has appeared relaxed about the moves.

The dollar index traded flat on Wednesday morning, having risen more than 1 per cent during this month. European equity investors also held back from making strong bets, with the regional Stoxx 600 opening flat and London’s FTSE 100 down 0.1 per cent.

At the conclusion of the Fed’s meeting later on Wednesday, analysts expect the central bank’s policymakers to upgrade their forecasts to reflect a turbocharged recovery for the US economy from the pandemic. Bond investors will also closely scrutinise policymakers’ communications around the timing of the first post-recession interest rate rise and the potential wind-down of its $120bn a month asset purchase programme that has supported financial markets since last March.

Analysts at TD Securities forecast that a hawkish tone on rates and tapering could lift bond yields by a further 0.07 percentage points, although their base case was for the Fed to downplay the likelihood of sustained inflation.

Dickie Hodges, a bond fund manager at Nomura Asset Management, argued the central bank would not rush to tighten financial conditions while the US labour market was stricken by the pandemic.

“It will take time for wage pressure to feed through into a workforce that exhibits considerable slack,” Hodges said. Fed policymakers, he added, “have indicated that they are willing to tolerate much higher rates of inflation than are currently discounted by bond yields”.

In other markets, sterling added 0.2 per cent against the dollar to purchase $1.392 as traders looked ahead to the Bank of England’s latest rate-setting meeting on Thursday and gambled that it would once again hold back from reducing interest rates below zero.

Brent crude, the international oil benchmark, added 0.5 per cent to $68.72 a barrel despite jitters in this market on Tuesday generated by countries across Europe suspending AstraZeneca’s coronavirus vaccine.

Saudi Arabia, the dominant member of the Opec + group of oil-producing nations, was “willing to defend” keeping the oil price at $60 or above, analysts at Bank of America wrote in a research note, with Brent also unlikely to fall below this level because the US shale industry had moved from rapid expansion generated by unsustainable borrowing into a phase of “capital discipline”.