European bonds tumbled and money market traders added to European Central Bank rate hike bets after data showed the US economy is running hotter than expected.
(Bloomberg) — European bonds tumbled and money market traders added to European Central Bank rate hike bets after data showed the US economy is running hotter than expected.
German two-year yields — among the most sensitive to changes in monetary policy — rose as much as 15 basis points on Friday to above 3.06% for the first time since 2008. Money markets now price the ECB deposit rate to peak at around 3.85% later this year compared to around 3.5% at the beginning of the year.
The move is part of a broader repricing across global rates markets, fueled by concern a string of resilient economic data could pave the way for further central bank tightening. Traders also priced out the risk of ECB rate cuts by the end of this year on Friday.
“Markets have had lot to absorb since the last set of central bank meetings,” said Pooja Kumra, European rates strategist at Toronto-Dominion Bank. “Euro and sterling rates markets have reacted to each and every strong release in US.”
The US personal consumption expenditures price index increased 0.6% from a month earlier, more than anticipated by economists, Commerce Department data showed Friday. Personal spending, after adjusting for changes in prices, jumped 1.1%.
The more bearish sentiment also spread to UK rates markets, with two-year gilt yields jumping as much as 15 basis points to 4.03%, the highest level since October. Traders also moved to fully price in 50 basis points of Bank of England rate hikes cumulatively by May.
Anticipation of further central bank tightening flattened yield curves, with the 2- to 10-year segment of the German curve inverting to 50 basis points for the first time since 1992. The inversion comes as traders bet inflation will eventually slow enough to allow central banks to cut rates in the coming years.
US PCE Inflation Accelerates, Adding Pressure for More Fed Hikes
Government bonds in the euro-area and the UK have also been weighed down by regional economic data and hawkish central bank officials. Just this week, British companies reported a return to growth for the first time in seven months, while in the euro-area, a gauge of underlying price pressures for January was revised higher to a record 5.3% earlier this week.
“Any inflation release deviating from the idyllic path of a quick return to the pre-pandemic utopia of a global 2% rate means central bankers become more hawkish and the market prices in another notch higher in terminal interest rates,” wrote Chris Iggo, chief investment officer of core investments at AXA Investment Managers in a note to clients.
–With assistance from Greg Ritchie.
(Updates prices and adds context throughout.)
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