Dollar upbeat on rate rise expectations, bonds fall

Thu Mar 20, 2014 5:25am EDT
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By Carolyn Cohn

LONDON (Reuters) - The dollar steadied at higher levels on Thursday and stocks and bonds fell across the globe as investors positioned for U.S. interest rates to rise sooner and faster than previously thought.

Global stocks as measured by the MSCI world equity index .MIWD00000PUS dropped 0.6 percent, adding to the previous day's losses after Federal Reserve Chair Janet Yellen said the U.S. central bank might end its bond-buying program this autumn, and could start to raise interest rates around six months later.

Combined with a slight rise in the projected path for rates by Fed members, that led the market to bring forward the likely timing of the first hike in U.S. rates by a couple of months.

The whiplash was felt most in the short end of the Treasury market which is more sensitive to the course of the Fed funds rate. Yields on two-year notes shot up 8 basis points on Wednesday to 43 basis points, the sharpest single-day rise since mid 2011, and were trading at 42 bps on Thursday.

European stocks .FTEU3 dropped 0.4 percent on Thursday, following losses of more than 1.5 percent in Japan .N225 and other Asian markets. .MIAPJ0000PUS

Yellen sought to use her news conference to emphasize that rates would stay low for a while and rise only gradually, but the message was lost on skittish markets.

Her words led the futures market for the U.S. Fed funds rate to shift to pricing in around a 50-50 chance of the first hike in May to June next year. The timing had been July to August beforehand.

Yet many were not convinced the timetable had moved much at all. A Reuters poll of 17 primary dealers found 10 still expected the first hike to come in the second half of 2015, and four were still tipping 2016.   Continued...

Traders work on the floor of the New York Stock Exchange February 19, 2014. REUTERS/Brendan McDermid