10-year U.S. Treasury yields jumped 14 basis points on the week, finishing at 1.90%, the highest level since December 2019. However, rising interest rates aren’t just a U.S. phenomenon. Since the start of 2022, yields on 10-year government bonds in Germany, Italy, and the United Kingdom have marched higher. Notably, German 10-year yields, which have spiked 41 basis points (0.41%) this year, are in positive territory for the first time since May 2019.
Similar to the U.S., higher rates, inflation, and central bank policy are a focus for investors in Europe. Christine Lagarde, President of the European Central Bank (ECB), had a more hawkish tone in her press conference on Thursday and stated that inflation is a unanimous concern for the members of the ECB’s Governing Council. Additionally, the Bank of England raised its benchmark rate 25 basis points (0.25%) to 0.50%, its first back-to-back increase since 2004. This comes amid higher inflation in the Eurozone, with inflation readings running at 5.1% on a year-over-year basis in January.
As investors expect central banks to become less accommodative in the face of higher inflation, global interest rates have risen. This has drastically reduced the amount of global debt carrying a negative yield to the lowest totals in six years. As a result, the yield advantage of U.S. debt relative to some of our developed peers has diminished, which likely contributed to the upward momentum in U.S. Treasury yields last week. Ultimately, we expect the threat of inflation to remain at the forefront for investors as they weigh its potential impact upon monetary policy, interest rates, and the economic recovery.
A look back
- Global equities rallied almost 2% on the week with broad-based strength across U.S., international developed, and emerging markets. The S&P 500 posted its best week of the year with a 1.6% return.
- The yield on the 10-year U.S. Treasury bond rose 14 basis points (0.14%) on the week as the market continues to price in a faster pace of rate hikes from the Federal Reserve (Fed).
- January U.S. payrolls seemingly shrugged off the omicron variant by adding 467,000 jobs vs. 125,000 expected, far exceeding consensus estimates.
A look ahead
- Rate hikes by the Fed continue to be top of mind for investors. Economic data, especially this week’s inflation readings, will be parsed for any implications for the pace or number of rate hikes.
- Investors will continue to keep one eye on the situation between Russia and Ukraine as any incursion could have large ramifications for Europe.
- Economic releases: NFIB Small Business Optimism, MBA Mortgage Applications, Wholesale Inventories, Consumer Price Index, and University of Michigan Sentiment.
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