US government debt under pressure as markets price in larger rate rises

US government debt came under renewed pressure on Thursday after inflation data for June came in hotter than expected, sparking expectations of a full percentage-point rate rise by the Federal Reserve.

The yield on the two-year Treasury bond, which closely tracks interest rate expectations, rose 0.07 percentage points to 3.21 per cent. The benchmark 10-year yield also added 0.07 percentage points to 2.97 per cent. Bond yields rise when their prices fall.

Those moves meant that the so-called Treasury yield curve remained at its most inverted in more than 20 years, a scenario that has historically preceded recession in the world’s largest economy.

US consumer prices rose by their most in 40 years last month, a report from the Bureau of Labor Statistics showed on Wednesday, with the annual pace of inflation topping economists’ forecasts to hit 9.1 per cent.

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Futures markets are now pricing in the possibility of a 1 percentage point interest rate by the US central bank, after the Fed raised borrowing costs by 0.75 percentage points in June — the most since 1994.

Salman Ahmed, global head of macro and strategic allocation at Fidelity International, said a 0.75 percentage point rise “looks very likely” and noted that “a significant amount of slowdown is already in the pipeline with high likelihood of imminent recession in the US”.

Fed chair Jay Powell has previously emphasised the central bank’s “unconditional” approach to bringing down inflation, even if this prompts a recession.

Caleb Thibodeau, a senior associate at Validus Risk Management, said: “A full percentage point increment would signal to the market [that] ‘we have lost control and are panicking’.”

Against a backdrop of uncertainty over the economic outlook, Europe’s regional Stoxx 600 share gauge lost 0.3 per cent in early dealings on Thursday, while Hong Kong’s Hang Seng slipped 0.3 per cent. Japan’s Topix closed the day up 0.2 per cent.

A FTSE gauge of Italian stocks slipped more than 1 per cent after the country’s populist Five Star Movement said it will not support Prime Minister Mario Draghi’s national unity government in a critical confidence vote on Thursday.

US shares whipsawed after the CPI data on Wednesday, with the S&P 500 ending the day down 0.5 per cent. Futures contracts tracking the broad-based index pointed down 0.6 per cent on Thursday morning.

In currency markets, the dollar index, which measures the greenback against a basket of six other currencies, rose 0.1 per cent. The euro slipped 0.2 per cent to a fraction above $1, having briefly hit parity in the previous session for the first time in two decades.

The Japanese yen weakened further to a fresh 24-year low against the dollar, sliding 1.2 per cent to ¥139.15. The currency has now fallen 17 per cent this year.

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