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Government bonds slip as Fed officials focus on inflation

Government bonds were under pressure on Wednesday as traders expected the world’s most influential central banks to extend their aggressive rate hikes to combat rising inflation.

The yield on the 10-year US Treasury note, which underpins debt pricing around the world, added 0.05 percentage points to 2.79 percent, a sharp increase from a level of about 2.5 percent the previous day.

The two-year Treasury yield, which follows interest rate expectations, rose steadily during the week and reached 3.1%.

Fed officials signaled on Tuesday that the central bank is committed to its aggressive fight against rising prices, prompting investors to price in more rate hikes that reduce the appeal of fixed-income bonds.

The Bank of England is expected to raise its main interest rate at a particularly high rate 0.5 percentage points on Thursday, a move that investors said could change market expectations that central banks may moderate the pace of interest rate hikes as they try to fend off domestic economic slowdowns.

“The BoE decision means we face another central bank rate hike with a hawkish outlook,” said Maya Bandari, head of global multi-asset at BNP Paribas.

“This will be a sharp reminder to the markets that the recent shift from inflation concerns to recession pricing was premature and that the central banks are very focused on curbing inflationary pressures.”

The UK 10-year gilt yield rose 0.08 percentage points to 1.92%. The two-year gilt yield added 0.1 percentage points to 1.79%.

San Francisco Fed President Mary Daley said in a LinkedIn interview on Tuesday that the central bank was “not close” in its fight to cool inflation, which continues to run at a 40-year high.

In a separate interview, Chicago Fed President Charles Evans said that a 0.75 percentage point increase in September “could be fine.”

The Fed raised its main funds rate by 0.75 percentage points for the second month in a row in July, bringing it to a range of 2.25 to 2.5 percent. Futures markets now place a 40% chance of another 0.75 percentage point hike at the central bank’s next rate-setting meeting in September.

Germany’s 10-year bond yield rose 0.08 percentage points to 0.8% as the debt price fell. Italy’s equivalent bond yield added 0.07 percentage points to 2.99%.

The concerns halted gains in stocks, which struggled for solid direction in lackluster summer trading conditions this week. In early trading in New York, Wall Street’s S&P 500 was up 0.7% and the technology-heavy Nasdaq Composite was up 1.5%. Europe’s Stoxx 600 regional stock index rose 0.3%.

Stocks showed an “air of complacency” and a “lack of appreciation” of the “risks that this inflation brings,” said Caspar Elmegreen, head of equities at Amundi. “Inflation is a real problem, it’s dangerous to underestimate it.”

Government bonds slip as Fed officials focus on inflation Source link Government bonds slip as Fed officials focus on inflation

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