September 26, 2022

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US Treasuries are selling big as upbeat data heightens Fed's concerns about higher interest rates

US Treasuries are selling big as upbeat data heightens Fed’s concerns about higher interest rates

US government bond prices fell on Tuesday after an upbeat survey of the nation’s broad service industry raised expectations that the Federal Reserve will raise interest rates further.

The yield on the 10-year Treasury, seen as a proxy for borrowing costs worldwide, added 0.15 percentage point to 3.34 percent. The yield on the two-year bond, which is sensitive to changes in short-term interest rate expectations, rose 0.11 percentage point to 3.50 percent. Bond yields rise as their prices fall.

Those moves, which followed a public holiday in the United States on Monday, became more certain after the closely watched Institute for Supply Management survey showed that services activity beat economists’ expectations, printing a reading of 56.9 in August compared with expectations of 55.1 and July. No. 56.7. Any number above 50 indicates expansion. Growth in business activity and new orders accelerated in the past month, the report said.

The data, after a strong labor market report last week, encouraged investors to raise their expectations about the extent and speed of feed it It will raise borrowing costs to tame inflation.

Futures markets are showing that investors expect the Fed’s benchmark rate to rise to 4 per cent by next March, compared to views in late July that rates will peak around 3.2 per cent.

Markets are pricing in a 75 percent probability that the Fed will raise rates by 0.75 percentage points at its meeting in late September, which would mark the third consecutive increase of that size. The central bank’s current target range stands at 2.25 to 2.50 per cent.

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Analysts at Citi said the ISM survey “points to the resilient services side of the economy, despite pressure from rising prices and continuing difficulties in hiring workers.

“This would keep the Fed taking a hawkish stance with [0.75 percentage point] The rise in September, as inflationary pressure in services appears more indicative of tight labor markets with less feed-in to commodity shocks.”

The strong ISM reading contrasted with a separate survey for the same sector published by S&P Global on Tuesday, which indicated that the services sector was in contraction territory. “The source of the discrepancy is unclear, but the strong ISM reading is pushing back immediate concerns about slowing economic activity,” Citi said.

Government bond yields have risen in volatile trading in recent weeks after hawkish comments from the Federal Reserve and the deepening European energy crisis have shaken financial markets. Federal Reserve Chairman Jay Powell last month reiterated the US central bank’s commitment to curb rapid price growth, saying they “should continue to do so until the job is done.”

Wall Street’s broad S&P 500 was down 0.5 percent in the mid-afternoon, while the heavy Nasdaq Composite was down 0.8 percent. Indexes fell 1.1 percent and 1.3 percent, respectively, on Friday, concluding a third consecutive week of declines as fears of a recession exacerbated by tighter monetary policy overshadowed market sentiment.

On Thursday, the European Central Bank will release its monetary policy decision, with many Wall Street banks forecasting a massive three-quarter point increase. The European Central Bank raised interest rates in July for the first time in more than a decade by an unexpectedly large 0.5 percentage point.

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Moves in US government bonds on Tuesday returned to other bond markets. The UK’s stunning 10-year benchmark yield added 0.16 percentage point to 3.1 per cent, after touching 3 per cent on Monday for the first time since 2014, according to Refinitiv data. Britain’s 10-year government borrowing costs in the gold market rose by more than 0.9 percentage points last month, the largest rise since at least 1989.

in currencies, Japanese Yen It fell as much as 1.7 percent to 142.97 yen against the dollar, hitting a 24-year low, as tight yield curve controls in Tokyo contrasted with higher bond yields in other major economies — reducing the national currency’s attractiveness.

“The yen’s role as a safe haven has been eroded by Japan’s deteriorating trade situation, and [fall in the yen] “There may be more work until the Japanese authorities step in,” ING analysts said.

In European stocks, the regional Stoxx 600 Index closed 0.2 percent higher.