Yields on two-year Treasury notes jumped the most since 2011 while stocks slid and the dollar climbed as Federal Reserve Chair Janet Yellen said the central bank’s stimulus program could end this fall and benchmark interest rates could rise six months later.
Two-year yields advanced seven basis points to 0.42 percent at 4:15 p.m. in New York. The rate earlier climbed nine points, the most since June 2011. The Standard & Poor’s 500 Index (SPX) fell 0.6 percent, after the gauge closed within six points of a record yesterday. The dollar strengthened against all of its 16 major peers, rising 0.9 percent against the yen. Gold dropped the most in three months.
“I think the market being reminded that the Fed will eventually raise rates is getting traders’ attention,” John Canally, an economic strategist at LPL Financial Corp. said in a phone interview from Boston. His firm oversees about $438.4 billion. “We’ll probably get a couple days of back and forth in the markets, but this is all good change.”
Bonds and U.S. equities retreated as the Fed said officials predicted their target interest rate would be 1 percent at the end of 2015 and 2.25 percent a year later, higher than previously forecast, as they upgraded projections for gains in the labor market. The central bank also reduced the monthly pace of bond purchases by $10 billion, to $55 billion.
Benchmark indexes extended losses as Yellen said the quantitative easing program would end this fall if the Fed continues to taper purchases in measured steps. She said she sees a “considerable time” between the end of the stimulus and the first rate increase, meaning “six months or that type of thing.”
Most Federal Open Market Committee participants reiterated their view that the Fed will refrain from raising the benchmark interest rate until 2015. The median rate among 16 Fed officials rose from December, when they estimated the rate at the end of next year at 0.75 percent, and 1.75 percent for the end of 2016. The central bank said it will look at a wide range of data in determining when to raise its rate from zero, dropping a pledge tying borrowing costs to a 6.5 percent unemployment rate.
“The FOMC was more hawkish,” said Anthony Valeri, a market strategist with LPL Financial Corp. in San Diego, which oversees $350 billion. “The expectation for higher rates got pushed forward and the bond market was not priced for that.”
Yellen said last month the U.S. economy was strong enough to withstand measured reductions to the central bank’s monthly bond purchases. By keeping its benchmark interest-rate target near zero and conducting three rounds of asset purchases, the Fed has helped push the S&P 500 up as much as 178 percent from a 12-year low as U.S. equities enter the sixth year of a bull market that started in March 2009.
Walt Disney Co., General Electric Co. and Boeing Co. lost at least 1.4 percent to lead the Dow Jones Industrial Average lower. Consolidated Edison Inc. led utilities to the biggest declines among 10 groups in the S&P 500.
The dollar rose 0.9 percent to 102.37 yen after falling 0.3 percent yesterday. The U.S. currency gained 0.7 percent to $1.3831 per euro. The euro rose 0.2 percent to 141.59 yen.
Gold for immediate delivery slumped 1.9 percent to $1,329.80 an ounce on speculation that a cut in central bank stimulus will curb demand for the precious metal as a haven.
The benchmark 10-year Treasury note rose 10 basis points to 2.77 percent. Yields on the notes declined 13 basis points last week, the most since the period ended Jan. 10, amid turmoil between Russia and Ukraine over control of Crimea.
Treasuries fell earlier in the day while stocks fluctuated as investors continued to watch developments on Crimea. The U.S. and Europe are moving to increase sanctions on Russia after President Vladimir Putin signed an accord setting in motion Crimea’s accession to Russia. With visa bans and asset freezes on Russian officials failing to sway Putin, European Union leaders will meet tomorrow to consider “additional and far-reaching consequences.”
Ukraine ordered the removal of its military from Crimea and said it will strengthen its deployments on the country’s border with Russia.
Global stocks climbed during the previous two days, with the S&P 500 advancing 1.7 percent, as Russia pledged not to seek territory beyond Crimea.
Moscow’s Micex index dropped 1.3 percent today, after rallying 8 percent in the past two sessions. The ruble climbed 0.5 percent to 36.06 against the dollar.
U.K. natural gas, the European Union’s benchmark contract, dropped for a third day, falling 2.4 percent to 56.57 pence a therm. Europe gets about a third of its natural gas from Russia, half of it through Ukraine.
The Stoxx Europe 600 fell 0.1 percent after jumping 1.8 percent in the past two days, rebounding from its biggest weekly loss since January. The number of shares changing hands today in Stoxx 600-listed companies was 25 percent above the 30-day average, according to data compiled by Bloomberg.
Bayerische Motoren Werke AG advanced 7.3 percent after the world’s biggest maker of luxury autos forecast “significant” gains in 2014 profit. Inditex SA (ITX) gained 4.9 percent after the Spanish owner of the Zara clothing chain reported rising revenue in the first six weeks of the fiscal year and said it will start online sales in more markets.
A gauge of insurers posted the second-biggest decline of the 19 industry groups in the Stoxx 600. U.K. Chancellor of the Exchequer George Osborne scrapped a requirement for British retirees to buy pension annuities. Legal & General Group Plc tumbled 8.4 percent and Aviva Plc dropped 5.2 percent.
The pound strengthened against 13 of its major peers. The currency advanced after the Bank of England said there’s risks of further gains in the pound and a government report showed the jobless rate was near a five-year low. The U.K. economy will grow 2.7 percent this year, more than previously forecast, Chancellor of the Exchequer Osborne said as he set out his penultimate budget before the 2015 election.
The pound added 0.4 percent to 83.63 pence per euro.
West Texas Intermediate rose 0.7 percent to $100.37, the highest in a week, after a government report showed that inventories at Cushing, Oklahoma, the delivery point for the contract, dropped a seventh week.
The Shanghai Composite Index fell 0.2 percent as Chinese developers extended declines after the collapse of a private developer spurred concern the industry may face defaults.
China’s central bank said it didn’t participate in an “emergency meeting” on the collapse of Zhejiang Xingrun Real Estate Co., a developer with 3.5 billion yuan ($565 million) of debt. The failure to pay back debts comes two weeks after the country saw its first onshore bond default and coincides with efforts by the government to reduce risks in the financial system.
“The manner in which the Chinese authorities resolve these defaults will have important implications on the industry,” Fitch Ratings Ltd. analysts Andy Chang and Kalai Pillay said in a note today. “We believe the authorities will force shareholders and some of the lenders, especially from the non-traditional sectors, to realize their losses.”
Copper rose 1.2 percent, erasing an earlier decline of as much as 2.5 percent that was fueled by concern that defaults by indebted Chinese companies will erode demand in the biggest consumer of the metal. Futures touched the lowest level since 2010 before rebounding.
China’s yuan slid below 6.20 per dollar for the first time since April as the central bank cut the currency’s fixing. The yuan fell 0.07 percent to close at 6.1965 per dollar in Shanghai, China Foreign Exchange Trade System prices show. The currency touched 6.2040 earlier, the lowest since April 8.