US stocks faltered and bond yields remained near their highest level in three years as investors braced for a campaign of interest rate hikes from the Federal Reserve.

The S&P 500 fell less than 0.1% early Monday afternoon. The technology-focused Nasdaq Composite rose 0.4%, while the Dow Jones Industrial Average fell 0.5%, or about 170 points. The moves followed last week’s rebound, as stocks rose for a second consecutive week.

Tesla shares rose 7.2% after the electric car maker said it would seek shareholder approval at its annual meeting for an increase in the number of shares in the company to allow for a split of shares.

Fed officials recently signaled their openness to the central bank raising interest rates by half a percentage point if the economic outlook requires it, rather than the quarter-point changes. percentage that are more usual. This has led economists and investors to reassess how quickly they expect interest rates to rise.

As the era of easy money policies comes to an end, markets could be choppy, according to Jeff Schwaber, managing director of Bluerock Capital Markets, “Investors will be further tested, in terms of preserving capital and portfolio positioning – now than it has been in decades,” said Schwaber.

Some investors have started to sell government bonds ahead of schedule. The yield on the benchmark 10-year Treasury note rose early on Monday before falling slightly to 2.459% from 2.491% on Friday. Yields fall when prices rise.

Yields on some short- and mid-term Treasuries, which are the most sensitive to Fed policy, rose more than those on longer-term bonds. The yield on the two-year Treasury note was recently 2.334%. Investors said they were eyeing the possibility of a so-called yield inversion – in which the two-year note yields more than the 10-year note – which is historically seen as a predictor of recession.

A trader worked on the floor of the New York Stock Exchange last week.


Photo:

BRENDAN MCDERMID/REUTERS

Treasury bill yields set a floor for interest rates across the economy and are a key component of the financial models investors use to price stocks and other investments. Rising yields are generally weighing on tech stocks in particular, as the ability to earn higher risk-free yields from bonds tends to make investors less interested in companies that are valued for their more distant earnings potential.

“It’s a tough market. I don’t think we are free and clear here,” said Karim El Nokali, investment strategist at Schroders. Persistent inflation, higher rates, geopolitical shocks and high valuations could threaten the market recovery, he said.

Meme shares rose, with GameStop adding 12% and AMC Entertainment Holdings gaining 26%.

Oil prices fell after Shanghai imposed tough pandemic restrictions that could weaken energy demand. Brent futures, the international benchmark, fell 6.2% to $110.05 a barrel.

Concerns about how Russia’s war with Ukraine will disrupt energy production have kept oil prices hovering around $100 a barrel in recent weeks. Rising prices have also heightened fears that consumers will have less money to spend on non-essential items, which is weighing on growth.

The S&P 500 energy sector fell 2.7% as energy companies pared their outsized gains. The sector has been the benchmark’s best performer this year so far, but analysts warn that a weaker demand outlook could dampen the recovery.

“The market currently assumes that [higher energy prices] will moderate the pace of growth and central banks will tighten,” said Mike Bell, global market strategist at JP Morgan Asset Management. The extent to which central banks can raise interest rates will likely depend on global growth and whether higher energy and oil prices require lower rates to dampen growth, he added.

Fed funds futures – derivatives used by traders to bet on the path of interest rates – show investors stepped up bets on a half-percentage-point rate hike during the the Fed’s May meeting since last week.

An inversion in the US Treasury yield curve has been seen for decades as a harbinger of recession, and it looks like it’s about to reignite. The WSJ’s Dion Rabouin explains why an inverted yield curve can be so reliable in predicting recession and why market watchers are talking about it now. Illustration: Ryan Trefes

Russia’s benchmark MOEX fell 2.2% in a shortened session on Monday as Moscow cleared all Russian stocks to trade. Foreigners remain banned from selling shares, which helps support the level of the benchmark.

The pancontinental Stoxx Europe 600 index gained 0.1%. Barclays shares fell 4.1% after the UK bank announced it was buying back a mass of structured notes at a loss of around £450m, or $591m, after selling too many of them .

In cryptocurrencies, the dollar value of bitcoin rose 3.2% from its level at 5 p.m. ET Sunday to $47,554, according to CoinDesk.

The Japanese yen fell 1.2% against the dollar to its lowest in more than six years after the Bank of Japan signaled it wanted to maintain a cap on rising yields.

Investors had begun to speculate that the central bank would not intervene to limit the rise in bond yields as the country’s benchmark 10-year bonds approached the upper limit of the target range of 0.25% of the Bank of Japan. That expectation reversed on Monday after the Bank of Japan offered to buy an unlimited number of 10-year Japanese government bonds at a fixed rate of 0.25%. The 10-year yield currently stands at 0.24%.

“The fact that they are not intervening on the yield curve where they have intervened before suggests that they may be allowing the curve to steepen. It was blown out of the water, so you saw the narrative change quite aggressively,” said Simon Harvey, head of currency analysis at broker Monex Europe.

Investors are likely to sell Japanese bonds in local currency, thus selling the yen, against bonds from countries that raise their interest rates, allowing for higher yields.

The main Asian indices closed on a mixed note. China’s Shanghai Composite edged up 0.1%. The South Korean Kospi was flat and the Japanese Nikkei 225 fell 0.7%.

Write to Caitlin Ostroff at [email protected] and Hardika Singh at [email protected]

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