Treasury yields and the dollar rose as investors assessed interest rate expectations

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The dollar rose to a six-month high on Tuesday, while government bonds came under pressure as investors weighed the future path of monetary policy and corporate debt issuance exacerbated market movements.

The dollar rose 0.6% against a basket of six peer currencies, touching its highest level since March.

Meanwhile, the yield on the 10-year Treasury note rose 0.1 percentage point to 4.27 percent, while the yield on the two-year policy-sensitive note rose 0.09 percentage point to 4.96 percent. Bond yields rise as their prices fall.

Investors cited expectations that US interest rates may need to stay “high for longer” after signs of continued economic resilience emerged.

Christopher Waller, a senior Fed official, noted that the US central bank is preparing to keep interest rates unchanged at its policy meeting later this month, but also said that recent data confirmed the possibility of a so-called soft landing for the economy. The latter reduces the chances of a rate cut soon.

Market watchers also note that the move in US government bonds may be a reflection, in part, of the technical implications of corporate bond issuance in the wake of the post-Labor Day borrowing rush – with companies hedging their positions in the Treasury market.

William O’Donnell, head of US interest rate strategy at Citigroup, said he believes Tuesday’s aggressive sell-off was “a direct result of or an extension of Friday’s strong ISM reading by Resource Management Services and the higher NFP number.”

Data last week showed that the US economy added 187,000 new jobs in August, the third month in a row below 200,000 jobs. Market participants have been scrutinizing the labor market numbers closely for clues about the future course of Fed policy.

But O’Donnell said that without factors including strikes in Hollywood, the number could have been much higher.

He added, “Moreover, this four-day week will see an estimated $40 billion to $60 billion in supply from investment-grade companies . . . to keep up with a very full supply calendar in Europe.

The Labor Day week is seasonally strong for investment grade debt issuance.

The moves in markets on Tuesday also followed weak economic data, including a survey showing that activity in China’s services sector in August fell to its slowest rate since President Xi Jinping lifted strict coronavirus restrictions at the start of the year.

The Caixin Services PMI came in at an eight-month low of 51.8 last month, down from 54.1 in July and below the 53.6 forecast of economists polled by Reuters. The reading approached the neutral 50 level that separates expansion from contraction.

In the eurozone, economic data also failed to match expectations, as the final Composite HCOB PMI fell to 46.7 in August, down from 48.6 in July, the lowest level since November 2020. The reading came in below the preliminary estimate of 47.

Adding to traders’ concerns about growth, oil prices jumped after Saudi Arabia announced that it would extend oil supply cuts by 1 million barrels per day until the end of December.

The settlement price for Brent crude, the global benchmark, rose 1.2 percent to reach its highest level in more than eight months at $90.04 a barrel after the announcement, while the price of US West Texas Intermediate crude rose 1.4 percent to $86.71.

In stock markets, the Standard & Poor’s 500 on Wall Street closed down 0.4 per cent, while the technology-focused Nasdaq Composite lost 0.1 per cent.

The European Stoxx Europe 600 closed down 0.2 percent, marking its fifth consecutive day of declines, while the French Cac 40 and Germany’s DAX fell 0.3 percent.

In China, the CSI 300 index fell 0.7 percent and the Hang Seng index in Hong Kong fell 2.1 percent, erasing most of the gains both indices made the previous day after news of new government support for the real estate sector.

Shares of troubled China developer Country Garden fell 1 per cent, posting losses larger than those incurred earlier in the day, after the company narrowly avoided default by making late payments on a two-dollar bond during grace periods.