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The Fed shakes up the Treasury market with a forecast of faster rate hikes

US stocks fell and Treasury yields rose after Federal Reserve officials said they expected interest rates to rise in 2023, a year earlier than expected.

The S&P 500 benchmark fell 0.6 percent due to declines in shares of technology companies Oracle, Microsoft and Facebook. The Nasdaq Composite also fell 0.6%.

The fall in the equity market sold it in the $ 21 million Treasury market, where the yield on the 10-year benchmark release rose 0.06 percent to 1.56 percent.

Among the shorter periods that are most sensitive to interest rate policy, larger movements occurred. Five-year note yield rose 0.09 percentage points to 0.88 percent, and two-year note yields reached a one-year high of 0.19 percent.

“When the market was with a patient Fed and inflation was hovering above the target, the point plot has changed,” said Seema Shah, chief strategist at Global Investors, citing a chart showing interest rate forecasts for Fed officials.

“It will be an account now [Fed chair Jay] For Powell and other Fed speakers to reassure markets once again, the tightening in 2023 does not necessarily have to be detrimental. ”

The equity market rally was based in part on interest rates over the past year, with the Fed anchoring them near zero since the crisis began in March last year.

While U.S. central bank policymakers showed they could rise sooner than expected, they have yet to make any changes to the Fed’s $ 120 billion-a-month asset purchase program, which investors expect will decline soon.

But markets are worried that signs of higher inflation, as Fed officials acknowledged in economic projections released on Wednesday, could force the hand of the central bank.

“Given that the only options to get out of the Fed update were higher rates, it is intuitively inferred that the Treasury is trading cheaper,” said Ian Lyngen, BMO Capital Markets U.S. interest rate strategist.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, added that the forecast for higher rates in 2023 meant that members of the Fed’s policy-setting committee “are now ready to talk about cuts, so President Powell won’t be able to repeat his March./April stonemasonry. We hope to recognize that the debate is underway, but that a firm decision is far from over. “

The US dollar index rose 0.4% along with a rise in Treasury yields. The pound fell 0.4 percent against the dollar and the euro fell 0.7 percent to $ 1.20.

European shares ended up in new records before the Fed’s decision was published. Stoxx Europe closed 0.2 percent for all other peaks, with the benchmark across the region having its ninth session back-to-back.

Frankfurt’s Xetra Dax rose 0.1 per cent, while Paris’s CAC 40 and London’s FTSE 100 rose 0.2 per cent.

Additional report by Siddharth Venkataramakrishnan in London


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