© Bloomberg

Investor fears of an overheating US economy are lingering in the bond market on Thursday, where 10-year Treasury yields are at renewed four-year highs as investors cut exposure to the debt.

The selling intensified during the previous session after the US government reported that consumer prices rose faster in January than most economists had anticipated, the latest sign that long-dormant inflation is on the rise.

Last week’s financial market turmoil was sparked by concerns US wages and prices were suddenly rising quickly and the new data led to a strong sell-off.

As it continues, yields are heading further above 2.9 per cent, up 2 basis points at 2.9296 per cent, around levels last seen in January 2014. The yield added 7 basis points on Wednesday after the inflation data and it started the year trading at 2.43 per cent.

A graphic with no description

US equity markets, which bore the brunt of last week’s volatility, proved more resilient. The S&P 500 dropped 0.5 per cent at the opening bell before reversing its losses and ending the day 1.3 per cent higher.

That was the equity market’s fourth consecutive positive performance, taking its bounce from last week’s lows to 6.7 per cent and helping ease some of the fears stirred up last week about how rising interest rates could impact the wider markets and economy. The Dow Jones Industrial Average rose 1 per cent on Wednesday, and the Nasdaq climbed 1.9 per cent.

Asia Pacific equities rallied on Thursday, with Hong Kong’s Hang Seng index closing up 2 per cent in a trading session shortened for the lunar new year holiday. Japan’s Topix index was up 0.9 per cent in the early afternoon.

European equities were expected to make gains, with opening calls pointing to a rise of 0.5 per cent for London’s FTSE 100 and a 1 per cent rise for Frankfurt’s Xetra 30.

Nonetheless, the US inflation figures reinforced sentiment the Federal Reserve may need to press the brakes on the US economy harder than it had previously signalled, sharply ending a decade-long era of easy money.

“What is disturbing the market here is the pace of interest rate expectations,” said Matthew Forester, chief investment officer at Lockwood Advisors, a unit of BNY Mellon. “The bond market had been expecting upward pressure on interest rates, but we are getting that faster than the market had expected last year.”

Commerce department data showed the annual rate of headline inflation hit 2.1 per cent in January, stronger than the consensus forecast of 1.9 per cent and in line with the rise seen in December.

The core gauge of consumer prices, which excludes energy and food, stayed steady at 1.8 per cent, defying forecasts to slip to 1.7 per cent. Both readings were higher than expected for a second month in a row.

One of the main drivers was a surge in petrol, which helped push January’s overall prices up by 0.5 per cent over the previous month — a bigger jump than foreseen by any of the 74 economists polled by Bloomberg. But even stripping that out still left a strong picture. January’s core inflation rate saw the biggest monthly rise since March 2005.

A graphic with no description

Airfares were the only weak component, according to Michael Pearce, senior US economist at Capital Economics. “The most striking thing is that almost every category saw rising prices in January, which is pretty much indicative of across-the-board strengthening of inflation pressures,” said Mr Pearce.

The US economic recovery has accelerated over the past year, lifted by a healthy global expansion and still-low interest rates around the world. But analysts said there were mounting concerns that a big tax cut and ramped up spending by the federal government could push the economy into overdrive.

Although markets have calmed markedly since last week’s tumult, the inflation figures for January had been anxiously awaited after signs of wage growth in the most recent US employment report sparked the volatility.

“We are moving towards more stability,” said JJ Kinahan, chief market strategist at TD Ameritrade, “but I still would expect more intraday volatility like we saw [on Wednesday] for the next week and half or so.”

Investors now believe the US central bank will raise interest rates at least three times this year — with the next quarter-point expected in March — and have priced a chance of nearly 20 per cent for at least four increases in 2018, according to Bloomberg calculations from the prices of Fed Funds futures.

In early January, the Fed Funds market implied investors thought there was roughly a 10 per cent chance of four interest rate increases this year.

“With a steady repricing of global bond markets having contributed to a sharp plunge in global stock markets, there could be a whiff of a new era in the air,” noted Gene Frieda, a strategist at asset manager Pimco.

Additional reporting by Michael Hunter in London

Get alerts on Markets volatility when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article