Bonds tumble as soaring inflation fuels bets on a 100 basis point Fed rate hike

(Bloomberg) – U.S. Treasury yields jumped after another hotter-than-expected inflation report sparked bets that the Federal Reserve could raise rates by as much as a full percentage point this month .

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The rise was led by shorter dated securities sensitive to policy changes, with yields on two-year notes climbing as much as 16 basis points to 3.21% before narrowing the jump. This has pushed the yield above those of 10-year bonds more since 2006, signaling a growing risk that higher rates will dampen economic growth.

The 9.1% annual rise in the consumer price index was the biggest since 1981 and the latest in a series of faster-than-expected increases that are prompting the Fed to act more aggressively to prevent inflation to take root.

After the report, traders estimated with near certainty that the Fed would raise its benchmark rate by three-quarters of a percentage point at the July and September meetings, with a one-third chance of a one-point increase. complete at this month’s meeting. On Wednesday, the Bank of Canada surprised the markets by raising its rates by this amount.

“General data is going to be extremely problematic for Fed messaging and will persist for an extended period of time,” said David Robin, strategist at TJM. “A 75 basis point hike is certain in July and now 75 basis points becomes increased certainty again in September as the Fed falls further and further behind the curve.”

Persistent inflation comes after the Fed raised its benchmark rate by 75 basis points in June, the biggest increase since 1994, and monetary policy tightening is cooling rate-sensitive sectors of the economy like US currency sales. houses. Another three-quarter point increase in July was already priced into swap contracts ahead of the CPI data; thereafter, contracts weighed the chances of an even bigger move.

Treasuries pared losses mid-morning as stock prices fell shortly after the opening bell. Two-year yields rose about 13 basis points, while 10-year yields rose 5 basis points to 3.02%.

While the cost of hotel and air fares, as well as car rentals, fell from May to June, after historic increases in recent months, other sectors, such as housing, accelerated and maintained the high price pressures.

These details suggest that the inflation report is not as strong as it appeared to be, as the drop in things such as travel costs signals that consumers are cutting back, said Gang Hu, managing partner of Winshore. Capital Partners, specializing in inflation-protected products. investments.

The strongest components such as housing are expected to decline in the coming months, due to rising rates, Hu said.

“What it’s doing is it could push people’s inflation expectations higher and force the Fed to overshoot,” Hu said. It’s not a “friendly number” of the market, he said.

The swap market shows that the Fed’s benchmark borrowing costs could peak at around 3.75% in the first quarter, from the current level of 1.75%. Traders then expect the Fed to start cutting rates.

Investors will be watching closely in the coming days for signals from Fed officials on whether they will increase the magnitude of their rate hikes at the July 27 meeting.

Priya Misra, global head of rates strategy at TD Securities, said she expects the Fed to stick to a three-quarter point hike given earlier guidance from Chairman Jerome Powell. .

“The Fed is very nimble and unconditionally focused on inflation. But we think they’re going to 75,” she said on Bloomberg Television. “We’ll see if their message changes.”

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