US Treasuries fell on Tuesday after an upbeat survey of the country’s huge services industry fueled expectations of another big rate hike by the Federal Reserve.
The yield on the 10-year government bond, which is used as an indicator of the cost of borrowing worldwide, rose 0.15 percentage points to 3.34 percent. The yield on the two-year bond, which is sensitive to changes in interest rate expectations, rose 0.1 percentage point to 3.49 percent. Bond yields rise when their prices fall.
Those moves, which followed a US holiday, became more insistent after a closely-watched survey by the Institute for Supply Management showed service activity had beaten economists’ expectations, registering a reading of 56.9 in August, compared to the Forecasts of 55.1 and the July reading of 56.7. Any number above 50 signals an expansion. Growth in business activity and new orders accelerated over the past month, the report said.
The data, which came after a robust jobs report for the world’s largest economy last week, prompted investors to upgrade their forecasts of how far and fast the Fed will hike borrowing costs to tame inflation.
The ISM reading contrasted with a weak S&P Global survey that pushed the US services industry into contraction territory. “The source of the discrepancy is unclear,” analysts at Citi said, “but the strong ISM readings are urging immediate concerns about a slowdown in economic activity.”
The new survey “points to a resilient services side of the economy, despite pressure from high prices and ongoing difficulties in hiring workers,” they added. “This should result in the Fed continuing to adopt a hawkish stance [0.75 percentage point] Increase in September as inflationary pressures in services tend to point to tighter labor markets with less impact from commodity shocks.”
Government bond yields have risen in volatile trading in recent weeks after aggressive rhetoric from the Fed and a deepening European energy crisis sent shivers through the financial markets. Fed Chair Jay Powell last month reiterated the Federal Reserve’s commitment to curbing rapid price growth, saying they “have to hang in there until the job gets done.”
Markets are now pricing in the possibility that the Fed will hike borrowing costs by 0.75 percentage point at its late September meeting, which would be the third straight hike of this magnitude. The central bank’s current target range is 2.25 to 2.50 percent.
Wall Street’s broad S&P 500 stock index fell 0.2 percent through late morning, while the tech-heavy Nasdaq Composite fell 0.1 percent as indices struggled for firm direction in New York. Benchmarks were down 1.1 percent and 1.3 percent respectively on Friday, ending a third straight week of decline as recession fears, compounded by tighter monetary policy, weighed on market sentiment.
The European Central Bank is set to make its own monetary policy decision on Thursday, with several Wall Street banks expecting a jumbo three-quarter point hike. The ECB hiked interest rates by an unexpectedly large 0.5 percentage point in July for the first time in more than a decade.
Treasury movements on Tuesday bounced off other debt markets. The UK benchmark 10-year gilt yield rose 0.16 percentage points to 3.1% after hitting 3% for the first time since 2014, according to Refinitiv data on Monday. The cost of 10-year UK government bonds in the gilt market had risen by more than 0.9 percentage point over the past month, the sharpest rise since at least 1989.
On the currency side, the Japanese yen fell as much as 1.7 percent to 142.97 yen against the greenback, marking a 24-year low as Tokyo’s tight yield curve controls contrasted with rising bond yields in other major economies – fueling the appeal of the country’s currency decreased.
“The yen’s role as a safe haven has been undermined by Japan’s deteriorating trading position [fall in the yen] We may have to go further before the Japanese authorities intervene,” analysts at ING said.
For European stocks, the regional stock index Stoxx 600 closed 0.2 percent higher.