Treasury yields rise as investors assess Fed’s interest rate path

Receive free Markets updates

We’ll send you a myFT Daily Digest email rounding up the latest Markets news every morning.

US government bonds came under pressure and stock markets wavered on Thursday as investors balanced the impact of softer inflation data against a weaker-than-expected 30-year bond auction.

The US Treasury sold $23bn in long-dated bonds at a high yield of 4.189 per cent, slightly above market levels ahead of the bid deadline. The coupon on the new debt was the highest since June 2011.

Analysts at Action Economics said the soft pricing wrongfooted markets.

“Yields have spiked higher, led by the long end in a bear steepening trade,” the added.

So-called bear steepeners involve long-dated yields rising faster than shorter ones, implying investors are expecting the cost of money to rise in the future.

The yield on the benchmark 10-year Treasury note rose 0.09 percentage points to 4.1 per cent, reversing declines in the first few hours of the trading session. The two-year yield added 0.04 percentage points to 4.84 per cent. Bond yields rise as their prices fall.

On Wall Street, the blue-chip S&P 500 closed flat having given up gains of more than 1 per cent early in the session following inflation data. The tech-heavy Nasdaq Composite added 0.1 per cent.

The moves on Thursday came after the latest US inflation reading showed prices rose at an annual rate of 3.2 per cent in July, marginally below the 3.3 per cent expected. The reading was higher than 3 per cent in the previous month.

Core inflation, which strips out volatile food and energy prices, came in at 4.7 per cent on Thursday, also slightly below the 4.8 per cent forecast of economists polled by Reuters.

The dollar, which often tracks interest rates, traded up 0.2 per cent against a basket of its crucial trading partners

The action in markets on Thursday also came after initial jobless claims for the world’s biggest economy came in at 248,000 for the week ending August 5 — higher than consensus estimates of 230,000 and up from 227,00 a week earlier.

The labour market has proved relatively resilient in recent months despite the Federal Reserve’s string of aggressive interest rate rises and is closely monitored for clues about the probable trajectory of monetary policy.

Futures markets are pricing in bets that the Fed will most likely keep rates steady at its September meeting, after lifting them for the 11th time in 16 months in July to a range of 5.25 per cent to 5.5 per cent.

“Our expectation is that the Fed is a long way from cutting rates,” said Wylie Tollette, chief investment officer of investment solutions at Franklin Templeton.

“The Fed has more work to do clearly — we’re still way above their 2 per cent target. It was a lot faster to get from 9 per cent to 3.2 per cent than it will be to get from 3.2 per cent to 2 per cent,” he added.

Meanwhile, European and Asian equities climbed. In particular, stocks sensitive to consumer spending rose after China announced it would resume outbound group travel to a list of 78 countries, after having closed its borders for almost three years during the coronavirus pandemic.

Europe’s region-wide Stoxx Europe 600 index added 0.8 per cent, extending gains from the previous session, while France’s Cac 40 rose 1.5 per cent and Germany’s Dax advanced 0.9 per cent.

Japan’s Topix rose 0.9 per cent. South Korea’s Kospi fell 0.1 per cent but the declines were offset by gains for travel and leisure companies.

The Stoxx Europe Luxury 10 index gained 2.7 per cent as investors expected demand for goods to rise once consumers in the world’s second-largest economy start to travel.

European natural gas prices fell after two Australian producers of liquefied natural gas held talks with unions on Thursday to try to stave off a strike that could disrupt global supplies.

The futures price on the Title Transfer Facility, the European benchmark, rose almost 40 per cent on Wednesday to its highest point since mid-June over fears that the strike would raise prices for buyers in Europe.

Chinese equities showed little reaction to a US executive order restricting investment in the country’s quantum computing, advanced chip and artificial intelligence industries. China’s CSI 300 gained 0.2 per cent while Hong Kong’s Hang Seng was flat.