US Treasuries sell off as upbeat data sharpen Fed rate rise fears

US government bonds and Wall Street stocks 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 interest rate expectations, rose 0.11 percentage points to 3.51 per cent. Bond yields rise as their prices fall.

Those moves, which followed a one-day holiday in the US, 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. Any figure above 50 signals expansion. Growth in business activity and new orders both accelerated last month, the report said.

The data, which followed a robust labour market report for the world’s largest economy last week, prompted investors to crank up their projections of how far and fast the Fed will lift borrowing costs to tame inflation.

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”.

Markets are now pricing in the possibility of the Fed raising borrowing costs 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.

Wall Street’s broad S&P 500 share index slipped 0.8 per cent, while the tech-heavy Nasdaq Composite lost 1.2 per cent. The indices had fallen 1.1 per cent and 1.3 per cent respectively on Friday, concluding a third straight week of declines, as fears of recession compounded by tighter monetary policy cast a pall over market sentiment.

The European Central Bank will on Thursday deliver its own monetary policy decision, with multiple Wall Street banks anticipating a jumbo three-quarter-point increase. The ECB raised rates in July for the first time in more than a decade by an unexpectedly large 0.5 percentage points.

The moves in US government bonds on Tuesday ricocheted into other debt markets. The UK’s 10-year benchmark gilt yield added 0.20 percentage points to 3.13 per cent, having touched 3 per cent on Monday for the first time since 2014, according to Refinitiv data. Ten-year UK government borrowing costs in the gilt market had soared more than 0.9 percentage points last month, the biggest rise since at least 1989.

In currencies, Japan’s yen tumbled as much as 1.5 per cent to ¥142.7 against the greenback, marking a 24-year low, as Tokyo’s strict yield curve controls contrasted with soaring bond yields in other major economies — lessening the appeal of the nation’s currency.

“The yen’s role as a safe haven has been eroded by Japan’s worsening trade position, and the [fall in the yen] may have further to go until Japanese authorities intervene,” said analysts at ING.

In European equities, the regional Stoxx 600 share index lost 0.3 per cent while Germany’s Dax added 0.3 per cent. London’s FTSE 100 fell 0.3 per cent.