The FTSE 100 has slumped into the red, weighed down by a warning on interest rates from the Federal Reserve that sparked a big sell-off in US government bonds.
The UK blue-chip index fell 67 points, or 0.9%, to 7,444, as Federal Reserve chair Jerome Powell last night said the central bank may need to speed up the pace of interest rate rises if the ‘remarkably positive’ US economy continues to grow.
That sparked a big sell-off in US government bonds, or treasuries, with the yields, which move in the opposite direction to prices, spiking.
The yield on 10-year treasuries jumped from 3.08% to 3.22%, a seven-year high.
That drove a widespread sell-off on the FTSE 100, with the vast bulk of stocks in the red.
‘The Treasury yield is commonly seen as the risk-free rate for investing, so an increase tends to be negative for other asset classes including shares,’ said Russ Mould, investment director at AJ Bell.
‘If earnings momentum peters out there could be trouble ahead, especially if the prospect of a 3.2% yield in dollars from the US government starts to persuade investors to reduce their allocation to the riskier option of equities in search of yield and capital gain at the same time.’
‘Defensive’ stocks, sometimes labelled ‘bond-proxies’ for their reliable, coupon-like dividends, were the worst hit by the sell-off in the bond markets.
Shares in emerging markets and Asia-focused investment trusts were among the heaviest fallers this morning.
India Capital Growth (ICG ) tumbled 5.3% to 81.8p, JPMorgan Emerging Markets (JMG ) fell 3% to 831p, Fidelity Asian Values (FAV ) was down 2.9% to 384p and Schroder Asia Pacific (SDP ) dropped 2.6% to 415p.
Ted Baker (TED) was the biggest faller on the FTSE 250, down 10.1% at £20.74 as the clothing retailer posted a 3.2% drop in profits and warned of a ‘challenging’ rest of the year.