Global markets tumble as US bond yields unnerve investors

Global equity markets have tumbled amid worries that growing US treasury yields will increase interest rates and drive up borrowing costs.

The American treasury yields hit their highest level in nearly four years, brushing just over three per cent yesterday, due in part to rising inflation and worries over a more assertive Federal Reserve.

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“Three per cent is a closely watched psychological level for US treasury yields and the fact is has been breached dampened demand for US equities,” said Jasper Lawler, head of research at London Capital Group. “Higher interest rate expectations mean higher corporate borrowing costs, in turn making investments more expensive. There is also the added concern that the Fed could decide to hike rates more quickly”.

The Dow Jones dropped 400 points overnight, while the S&P 500 tumbled down 1.3 per cent and the tech-heavy Nasdaq plummeted 1.7 per cent.

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The tumble on Wall Street hit Asian stocks as well, with the Asia-Pacific MSCI index dropping 0.3 per cent, its weakest showing in almost three weeks. Japan’s Nikkei dropped 0.2 per cent as well.

Europe awoke this morning to similarly bad news. Driven by slightly lower than expected results from Lloyds Bank, the FTSE opened 45 points down, before rallying. Germany’s DAX index tumbled nearly 200 points, while the French CAC was also down.

“At first glance this looks like a repeat of February’s yield rise stock tanks pattern; however, the market’s reaction is decidedly more measured this time,” said Lawler. “Not only have stocks stayed out of the correction zone so far, flows into the yen (the risk off trade) are nowhere near levels seen two months ago.”