GLOBAL MARKETS-Stocks sag as U.S. yields climb higher

BY Reuters | TREASURY | 01/10/22 04:35 AM EST

* European stocks fall, U.S. futures flat

* U.S. 10-year Treasury yield touches 1.8%

* Dollar stuck despite rising yields

* Traders look to U.S. inflation data, company earnings

By Tommy Wilkes

LONDON, Jan 10 (Reuters) - Stock markets struggled on Monday as U.S. Treasury yields reached a new two-year high and investors fretted about the prospect of rising interest rates and a surge in COVID-19 infections.

The small fall on Monday follows on from a bruising first week of the year when a strong signal from the Federal Reserve that it would tighten policy faster to tackle inflation, and then data showing a strong U.S. labour market, unnerved investors who had pushed equities to record highs over the holiday period.

Technology stocks, which have soared the past two years thanks in part to very low interest rates, led the falls while investors bought into lower-valued energy and financial shares.

The drop on Monday was limited but across markets.

By 0900 GMT the Euro STOXX dropped 0.26%, Germany's DAX weaked 0.48% while Britain's FTSE 100 slipped 0.1%.

Futures on Wall Street pointed to a mixed open. The S&P 500 suffered its worst start to the year since 2016.

Asian shares bucked the trend on Monday. MSCI's broadest index of Asia-Pacific shares outside Japan added 0.6%

This week is a busy one, with U.S. inflation data due that could all but confirm a U.S. rate rise is coming in March and corporate earnings kicking off.

Analysts fear the U.S. consumer price report on Wednesday will show core inflation climbing to its highest in decades at 5.4% and usher in a rate rise as soon as March.

"The persistent rise in consumer inflation could further boost the Fed hawks, bring them to price a steeper normalization path, and more importantly fuel the expectation that the Fed should rapidly reduce the size of its balance sheet to avoid flattening the yield curve while fighting back inflation," said Ipek Ozkardeskaya, an analyst at Swissquote.

Ozkardeskaya added that there was "plenty of hawkishness" yet to be priced into assets.

While the December payrolls number released last week did miss forecasts, the drop in the jobless rate to just 3.9% and strength in wages suggested the economy was running short of workers.

Markets quickly shifted to reflect the risks with futures implying a greater than 70% chance of a rise to 0.25% in March and at least two more hikes by year end.

Yields on 10-year U.S. Treasury notes hit 1.80% in early trading - levels last seen in early 2020, having shot up 25 basis points last week in their biggest move since late 2019.

"We think that the increase in long-dated Treasury yields has further to run," said Nicholas Farr, an economist at Capital Economics.

"Markets may still be underestimating how far the federal funds rate will rise in the next few years, so our forecast is for the 10-year yield to rise by around another 50bp, to 2.25%, by the end of 2023."

Germany's 10-year benchmark yield edged higher to -0.026%, closer to the 0% level it last traded at in 2019.

The dollar index edged up to 95.878. The greenback has failed to find significant support from rising Treasury yields.

The euro stood at $1.1337, down 0.2% on the day. The Japanese yen got a brief break from its recent bear run but still slipped to 115.66.

In commodity markets, gold was a shade stronger at $1,796 an ounce and well short of its January top of $1,831.

Oil prices held to recent gains, having climbed 5% last week helped in part by supply disruptions from the unrest in Kazakhstan and outages in Libya.

Brent was last unchanged at $81.79 a barrel, while U.S. crude traded at $78.93.

(Additional reporting by Wayne Cole in Sydney, Editing by William Maclean)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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