Government debt hit as traders weigh prospect of further Russia sanctions

US and eurozone government debt sold off on Tuesday as traders weighed the prospect of stronger sanctions against Russia and comments from a top policymaker at the Federal Reserve that signalled the central bank would move more aggressively to curb inflation.

The yield on the 10-year US Treasury note — which moves inversely to its price and is a benchmark for borrowing costs worldwide — climbed 0.14 percentage points to 2.54 per cent, just below a three-year high hit in March. The yield on the policy-sensitive two-year note jumped 0.09 percentage points to 2.51 per cent.

The sell-off in the US was exacerbated by comments from Federal Reserve governor Lael Brainard, who on Tuesday said she expected the central bank would begin a “rapid” reduction of its balance sheet to tighten policy.

Eurozone sovereign bonds were also hit by a wave of selling, with the yield on Germany’s 10-year Bund adding 0.1 percentage point to 0.61 per cent and Italy’s equivalent bond yield rising 0.17 percentage points to 2.23 per cent. The UK’s 10-year gilt yield added 0.12 percentage points to 1.66 per cent.

Brussels said a block on Russian coal exports would be part of an upcoming fifth sanctions package under discussion by EU member states. Restrictions on oil imports are being considered, though not expected as soon as this week’s package.

Line chart of Yield (%) showing 10-year US Treasury yield nears three-year high

On Monday, the US and France had called for a significant escalation of punitive measures against Russia, following reports of atrocities by its forces in Ukraine. US president Joe Biden said he would “continue to add more sanctions” on Russia and called for a trial to assess possible war crimes committed by Vladimir Putin’s forces.

“Markets are trying to price in the tail risk of energy sanctions against Russia but also making sure that they’re not caught offside should a ceasefire be agreed in relatively short order,” said Edward Park, chief investment officer at Brooks MacDonald. “I think we’re seeing a row back [in optimism] today.” 

Coal futures for April were up more than 10 per cent on Tuesday at $290 a tonne. Oil prices dipped, with Brent crude, the international benchmark, 0.5 per cent lower at $107 a barrel.

Supply-chain disruptions sparked by Russia’s invasion of Ukraine have added to concerns about persistently high levels of global inflation.

Data released on Tuesday showed that rising prices for energy and food pushed inflation to a 30-year high in February across the OECD group of rich countries. The annual rate of consumer prices across the 38 member countries advanced 7.7 per cent, up from 1.7 per cent a year before.

In equity markets, the US’s benchmark S&P 500 share gauge fell 0.3 per cent while the technology-heavy Nasdaq Composite dropped 1.2 per cent. Europe’s Stoxx 600 index moved between small gains and losses, while Germany’s Dax slid 1.1 per cent.

Tancredi Cordero, founder of Kuros Associates, said the German economy “in particular will see its average input costs, when it comes to energy and commodities, rising considerably, which will dent operating margins of most domestic companies”.

“I don’t think there will be a recession [in Germany], it’s too strong an economy,” he added. “But in the short term, Germany will be reduced in terms of exposure by institutional investors.”

Elsewhere in equity markets, Japan’s Nikkei 225 stock index closed 0.2 per cent higher, while the broader Topix index fell 0.2 per cent. Markets in China and Hong Kong were closed on Tuesday for a public holiday.

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