US government bonds sold off sharply on Wednesday after the labor department reported consumer prices soared last month, intensifying concerns the Federal Reserve will need to act more decisively to slow inflation.
Yields on two-year Treasury notes, which are highly sensitive to interest rate expectations, rose by the most since the market turbulence triggered by the coronavirus outbreak in March 2020. The yield increased 0.09 percentage points to 0.52 per cent, signalling a significant fall in price.
The biggest move was in the five-year note, which rose 0.14 percentage points to 1.22 per cent. Bonds with shorter-dated maturities rose in price last week after Jay Powell, Fed chair, vowed to take a “patient” approach to raising interest rates on expectations that such high levels of inflation would prove to be fleeting.
However, the data released on Wednesday showing US consumer prices climbed 6.2 per cent in October from the same month in 2020, well above expectations of 5.8 per cent, have cast doubt over that pledge.
“I don’t see how the Fed can afford to wait,” said Tom Graff, head of fixed income at Brown Advisory. “The pressure is getting awfully high for some sort of response.” Graff said that if inflation continued at this rate the central bank might be forced to accelerate its quantitative tightening so that it ends this winter.
Eurodollar futures, a closely watched measure of market expectations of Fed policy, showed that investors were pricing in a 75 per cent chance of a rate increase as soon as June 2022. And traders were pricing in at least two quarter point rate increases by the end of next year.
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An important market measure of inflation — the 5-year break-even inflation rate, which reflects where investors expect inflation will be in five years’ time — rose to 3.1 per cent, the highest level in records going back to 2002, according to Bloomberg data.
Longer-dated Treasuries, which provide a snapshot of investor expectations for economic growth and inflation further in the future, initially saw a more measured sell-off. But yields shot up after a lacklustre auction for new issues of 30-year bonds.
At midday on Wednesday the government sold $25bn of 30-year debt to soft demand. This was followed by an immediate sell-off in secondary markets, which pushed the yield on the long bond to a high of 1.96 per cent.
That move had eased later in the New York afternoon, though the yield remained 0.10 percentage points higher on the day at 1.91 per cent. The dollar index, which measures the US currency against six others, rose 1 per cent.
Stock markets moved lower. Equities have pushed to a series of record peaks in recent weeks despite inflation worries, as corporate earnings have indicated businesses have passed on higher prices to customers instead of sacrificing profits. Continue reading with FT...