US government debt under pressure on expectations of sharper rate rises

US government debt was under pressure on Tuesday as markets prepared for the Federal Reserve to aggressively raise interest rates to fight inflation.

The yield on the policy-sensitive two-year Treasury note rose 0.05 percentage points to nearly a 15-year high of 3.42 per cent, reflecting a fall in the debt instrument’s price as markets positioned for the Fed to raise rates by the largest amount in almost 30 years.

The benchmark 10-year Treasury yield rose 0.07 percentage points to 3.44 per cent, around its highest point since 2011. Bond yields rise as their prices fall.

The latest shakeout in the $23tn Treasury market, the world’s largest financial market and the bedrock of investment and loan pricing decisions by the world’s biggest banks and pension funds, came as traders positioned for the conclusion of the Fed’s latest monetary policy meeting on Wednesday.

Markets have now almost fully priced in a 0.75 percentage point rate rise by the Fed at the conclusion of its June policy meeting on Wednesday. Economists at JPMorgan, Goldman Sachs and Barclays all anticipate a 0.75 percentage point rise — which would be the first since 1994.

Analysts began ratcheting up their rate rise forecasts after data last Friday showed the annual pace of US consumer price inflation for May had exceeded expectations to hit 8.6 per cent, as Russia’s invasion of Ukraine pushed up food and fuel costs.

By 4difm

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