Government bonds rebounded on Thursday after the head of the US central bank insisted that there would be no rapid changes in monetary policy for the world’s largest economy.
Speaking at the Economic Club of New York on Wednesday afternoon, Jay Powell, the chairman of the Federal Reserve, underlined the importance of a “patiently accommodative” monetary policy to boost the pandemic-ravaged US labor market.
The yield on the two-year US Treasury bond dropped briefly below 0.1 percent for the first time on Thursday, according to Bloomberg data, before remaining steady at around 0.11 percent.
Further stimulus, the introduction of Covid-19 vaccines and continued support from the Fed have raised the prospects for a strong economic recovery this year and fueled expectations of higher inflation. It, in turn, has sparked fears that the Fed would reverse its $ 120 billion-plus in monthly asset purchases before the economy overheats. This monetary stimulus supported global financial markets during the pandemic by flooding the system with cash that institutional investors then spent on corporate bonds and stocks.
The benchmark yield on the 10-year Treasury rose 2 basis points to 1.16 percent on Thursday and the 10-year break-even rate, a measure of US inflation expectations derived from inflation-protected bond prices, gradually declined to around 2.00. 2 percent.
But Powell tried to dampen inflation expectations on Wednesday, saying that any price hike would be transitory and unlikely to affect monetary policy, while the labor market remained “far from” strong.
“This is a signal from the Fed that they will keep things the same until unemployment returns to pre-Covid levels,” said Remi Olu-Pitan, multi-asset fund manager at Schroders. “Despite fears of inflation, they are using the labor market to justify very loose policies.”
Market forecasts of US inflation remain high as President Joe Biden’s $ 1.9 billion stimulus bill is debated in Congress.
Gold prices, at $ 1,825 a troy ounce on Thursday, are up about 2 percent last week as investors bought the metal as a hedge against inflationary pressures.
“Markets were concerned about inflation, but what we now have from the Fed is that this is not their main concern,” said Olu-Pitan.
On Wall Street, the S&P 500 index fell 0.1 percent during the afternoon in New York, while the tech-focused Nasdaq Composite traded flat. This followed data showing strengthening of the market, which contributed to inflation expectations.
New unemployment claims in the US fell slightly last week to 793,000 from 812,000 the week before. Yet about 10 million Americans are less employed than a year ago.
In Europe, the Stoxx 600 benchmark closed 0.5 percent, while the FTSE 100 in London rose 0.1 percent and the Xetra Dax in Frankfurt 0.8 percent.
The dollar, measured against a basket of currencies, fell marginally higher.
Brent crude, the international oil marker, fell 0.5 percent to just above $ 61 a barrel after the latest industry data showed declining inventories as oil producers sought to clean up the surplus that had built up during the pandemic.
Oil prices rose sharply at the turn of the year, while industrial metals prices also stabilized. London-traded platinum rose to a six-year high of $ 1,268 an ounce on Thursday before cutting back some of those gains in the afternoon.
Nadège Dufossé, head of cross-asset strategy at fund manager Candriam, said she added commodities to her portfolios in case the end of the coronavirus blockades triggered a “ demand shock ” that pushed up inflation expectations and triggered a sell-off in bonds and stocks. . . “To protect your portfolio from this, you really want to have assets that can certainly benefit from a surge in consumer demand,” she said.
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