Treasury rout unnerves traders as stocks retreat

BLOOMBERG

Treasuries deepened a selloff, driving the 10-year yield to a nine-month high, and equities slumped as investors grew increasingly worried about rising borrowing costs. European stocks fell 0.8% and US equity futures contracts signaled that the S&P 500 will extend on August 2 losses. The dollar strengthened for a fourth day. Bill Ackman, founder and chief executive officer of Pershing Square Capital Management, added to the bearish mood by announcing he’s shorting 30-year Treasuries as a hedge on the impact of higher long-term rates on stocks.
The rapid rise in Treasury yields over the past four days has “cast a shadow” across risk assets and investors will be focused on the bond market until the US releases its quarterly financing report next week, wrote strategists at ING Groep NV. Today’s economic data, including jobless claims and a reading on the US services industry, will also be closely watched for any signs that the American economy is running hotter than expected. Apple Inc and Amazon.com Inc are due to report later in the day.
“Given the recent rally in US stocks, especially in the Nasdaq, there’s a lot of sensitivity to rising yields,” said Gerry Fowler, head of European equity strategy and global derivative strategy at UBS Group AG.
“In Europe, a lackluster earnings season is also weighing on the outlook. So many are taking the opportunity to implement a more bearish positioning.” The 10-year Treasury yield increased five basis points to 4.13%. The selling has come on the heels of robust US economic data and news that the Treasury will issue $103 billion of securities next week, slightly more than forecast.
The decision by Fitch Ratings to strip the US of its AAA credit ranking has also put a spotlight on the country’s booming fiscal deficits.
“The US downgrade doesn’t have any direct impact on markets, but what’s happened is there’s been a lot of concurrent news,” Fowler at UBS said. “Treasury supply is going to pick up. And the Bank of Japan’s policy change has also removed the floor on bonds and that’s led to rising yields.” Long-term debt looks “overbought” from a supply and demand perspective and it’s hard to see how the market will cope with the increased issuance “without materially higher rates,” Ackman said in a post on X, the platform formerly known as Twitter.
In Europe, the Stoxx 600 Index headed for the steepest three-day retreat since March. Infineon Technologies AG plunged as much as 12% after disappointing forecasts from the German chipmaker. Deutsche Lufthansa AG dropped amid concerns over debt and higher costs. Among other individual movers, PayPal Holdings Inc fell in US premarket trading after the digital payments company’s transaction revenue fell short of estimates. Qualcomm Inc slid as much as 8% after the chipmaker gave a revenue outlook seen as weak by analysts.
The Bank of England was also due to release its rate decision on Thursday. Traders are leaning towards a 25 basis points increase, but haven’t fully ruled out a 50-point hike as policymakers seek to subdue UK inflation that’s four times the official target. There’s also speculation the BOE will surprise economists by signaling an increase to the pace of bond sales as it looks to reduce its outsized footprint in the market.  “The moderation in UK consumer prices has lagged behind the rest of Europe, which may prompt the BOE to signal that it will maintain a hawkish stance in the remaining months of the year,” economists at Rand Merchant Bank in Johannesburg said in a note.
In commodities, iron ore slipped back below $100 a ton as investors questioned China’s resolve to revive growth with steel-intensive stimulus and the nation’s biggest group of mills called for curbs on trading. Futures in Singapore lost as much as 4.3%, to head for the sixth weekly drop in the past seven.