US government bond prices dropped on Tuesday after an upbeat survey on the country’s vast services industry fuelled expectations of further big interest rate rises by the Federal Reserve.
The yield on the 10-year Treasury note, seen as a proxy for borrowing costs around the world, added 0.15 percentage points to 3.34 per cent. The yield on the two-year note, which is sensitive to changes in short-term interest rate expectations, rose 0.11 percentage points to 3.50 per cent. Bond yields rise as their prices fall.
Those moves, which followed a public holiday in the US on Monday, became more emphatic after a closely watched Institute for Supply Management survey showed that services activity had outpaced economists’ expectations, registering a reading of 56.9 in August compared with forecasts of 55.1 and July’s figure of 56.7. Any figure above 50 signals expansion. Growth in business activity and new orders both accelerated last month, the report said.
The data, following on from a robust labour market report last week, encouraged investors to further crank up their projections of how far and fast the Fed will lift borrowing costs to tame inflation.
Futures markets show investors expect the Fed’s benchmark interest rate to climb as high as 4 per cent by next March, compared with views in late July that rates would peak around 3.2 per cent.
Markets are pricing in a 75 per cent likelihood that the Fed will lift rates by 0.75 percentage points at its late September meeting, which would mark the third consecutive increase of such magnitude. The central bank’s current target range stands at 2.25 to 2.50 per cent.
Analysts at Citi said the ISM survey “points to a resilient services side of the economy, despite pressure from high prices and continued difficulties hiring workers.
“This should keep the Fed pursuing a still-hawkish stance with a [0.75 percentage point] hike in September, as the inflationary pressure in services looks more indicative of tight labour markets with less feed- through of commodity shocks.”
The strong ISM reading contrasted with a separate survey of the same sector published by S&P Global on Tuesday, which suggested the service sector was in contraction territory. Citi said “the source of the discrepancy is unclear, but the strong ISM reading pushes back on immediate concerns over slowing economic activity”.
Government bond yields have climbed in volatile trading in recent weeks after hawkish rhetoric from the Fed and a deepening European energy crisis sent shivers through financial markets. Fed chair Jay Powell reiterated last month the US central bank’s commitment to curbing rapid price growth, saying they “must keep at it until the job is done”.
Wall Street’s broad S&P 500 share index slid 0.5 per cent in mid-afternoon trading, while the tech-heavy Nasdaq Composite fell 0.8 per cent. The indices had fallen 1.1 per cent and 1.3 per cent, respectively, on Friday, concluding a third straight week of…
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