Investors are demanding a higher premium for US debt most at risk of default after yet another round of talks on the borrowing limit ended without a deal.
Yields on four-week Treasury bills climbed 3.5 basis points on Tuesday, bringing their rise since the beginning of May to more than 60 basis points. The two-year Treasury yield increased 7 basis points. US equity futures were little changed after a lacklustre day on Wall Street.
In Europe, shares slipped as data showed manufacturing activity in the region shrank at the fastest pace since the pandemic three years ago. A rout in luxury-goods makers including Hermes International and LVMH dragged the Stoxx 600 lower, as Deutsche Bank AG analysts warned the sector is crowded and valuations are lofty.
The debt-ceiling saga has been the center of attention in global markets with time running out for US politicians to reach a deal. President Joe Biden and House Speaker Kevin McCarthy called their discussions productive, but an agreement that would avert a catastrophic US default remains elusive. That left traders on tenterhooks with only a few days left before June 1, when Treasury Secretary Janet Yellen said her department may run out of cash. Any deal would have to be approved by Congress before then.
“I think a default is very unlikely as I don’t think either Democrats and Republicans want it, but we could get close to it and the deadline,” Fabiana Fedeli, chief investment officer for equities and multi-asset at M&G Plc, said on Bloomberg TV. “The closer we get to the deadline the more nervous clients will get.”
“You could have a move towards safer havens, perhaps the long end of yield curve,” she added. In other markets, commodities were broadly lower, while the dollar and yen strengthened. Concern is growing about China’s tepid post-pandemic recovery, which is having a negative impact on iron ore and copper prices.
European market sentiment took a hit from the weaker manufacturing data. Surveys of purchasing managers across the region unexpectedly dropped to 44.6 in May, further below the 50 level that indicates contraction, according to the report from S&P Global.
Among individual stock movers, Vivendi SE tumbled after billionaire Vincent Bollore sold shares of the media conglomerate, a sign that he’s isn’t planning a buyout. Swiss asset manager Julius Baer Group Ltd sank after disappointing results.
S&P 500 futures fell as much as 0.2% in New York and the Nasdaq 100 futures drop 0.1%. While futures on the Dow Jones Industrial Average fell 0.2%, the Stoxx Europe 600 also drops 0.2% and the MSCI World index plunges by 0.2%.
The Bloomberg Dollar Spot Index rose 0.2% and the euro fell 0.4% to $1.0775. The British pound fell 0.5% to $1.2378 and the Japanese yen was little changed at 138.54 per dollar.
While the yield on 10-year Treasuries advanced three basis points to 3.74%, Germany’s 10-year yield advanced three basis points to 2.49% and Britain’s 10-year yield advanced eight basis points to 4.14%.