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(Bloomberg) -- Treasury yields posted their biggest two-day jump in decades on Monday, roiling assets around the world in one of the strongest signs yet that the era of easy money is coming to an end.
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Global markets blew through milestones that seemed far-fetched even a few days ago. Yields on three-year US Treasuries soared, capping the biggest two-day rise since 1987. The S&P 500 tumbled into a bear market, falling more than 20% from its record close in January. The spread between Italian and German benchmark yields -- a key gauge of risk in the euro-area -- grew to the widest since May 2020. And a gauge of the greenback rose to the highest since the onset of the coronavirus pandemic.
It all stemmed from a worse-than-expected US inflation report last week that underscored the stark choice before the Federal Reserve between fighting stubborn price pressures with aggressive interest-rate hikes and crash-landing the economy. That took on new weight Monday amid speculation that the Federal Reserve could raise rates by 75 basis points as soon as this week -- prompting a widespread recalibration from Sydney to New York.
“There are many cross-currents,” said Priya Misra, global head of rates strategy at TD Securities in New York. “The biggest issue is that central banks may be powerless to stop a recession and that is a tough message for markets to accept.”
Money markets now see the Fed’s key overnight rate peaking at 4% by the middle of next year, and a 50% chance of a three-quarter-point hike coming as soon as this week. Short-term US Treasury yields led the advance in the curve, with the three-year jumping almost 25 basis points Monday to 3.49%, the highest since 2007.
Meanwhile, a closely-watched part of the US yield curve inverted amid worries that tighter monetary policy could hinder growth in the world’s largest economy.
The day’s moves became more extreme as the US afternoon wore on.
The S&P 500 plunged 3.9% by the close as all 11 sectors finished in the red. At one point, every member of the S&P was falling and only five stocks recovered by the end of the day to notch gains.
Outside the US, a key index of equities from around the world slipped into a bear market and a gauge of volatility in global foreign-exchange markets surged to the highest level since 2020.
Almost all of the 31 major currencies tracked by Bloomberg weakened against the dollar as commodity-linked currencies from Norway, New Zealand and Australia -- traditionally favored when investors are optimistic on growth -- led losses among Group-of-10 peers; oil prices wobbled and copper sank.
The British pound fell to a two-year low against its US counterpart, after data showed the economy contracted unexpectedly and as traders await the Bank of England policy decision on Thursday. And elsewhere, the Brazilian real, the biggest laggard in the developing world on Monday, extended its longest losing streak since last July, weakening to the lowest level since mid-May.
The moves in foreign exchange almost universally favored the dollar. Investors have chosen the US currency as the safe haven of choice in the recent bout of volatility, as the yen -- another usual refuge in turbulent times -- hovers near a 20-year low versus the greenback. The Bloomberg Dollar Spot Index has climbed almost 8% so far this year.
Read more: Soaring Dollar Is ‘Only Safe Haven Left’ After Hot US Inflation
“Right now we have a strong directional view” said Olga Yangol, head of emerging-market research and strategy at Credit Agricole CIB. “We talk about active currency selection more often than not, but now it’s about getting the direction right. It’s about other currencies versus the dollar.”
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