US government bonds under pressure as Fed chair warns of more rate rises

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 selling pressure on Thursday, as the Federal Reserve chair warned interest rates will need to rise further for inflation to slow to its 2 per cent target.

The two-year Treasury yield, which is sensitive to changes in interest rate expectations, rose as much as 0.1 percentage point to top 4.8 per cent — its highest point since early March. It was later trading up 0.08 percentage points on the day.

The 10-year yield rose 0.07 percentage points to 3.8 per cent. Bond yields climb as their prices fall.

The moves came as Fed chair Jay Powell signalled to the Senate banking committee that the central bank could opt for two more quarter-point rate increases by the end of the year.

The Fed last week held interest rates steady in a range of 5 per cent to 5.25 percentage points, following 10 straight increases in just 14 months.

US Department of Labor data on Thursday showed the number of new applications for unemployment aid last week remained unchanged from the previous seven days, offering the central bank more leeway to take rates higher.

An index measuring the dollar against six other currencies gained 0.4 per cent, posting its strongest daily gain in nearly three weeks.

In equity markets, Wall Street’s technology-heavy Nasdaq Composite closed up 1 per cent, recovering after three successive days of losses. The benchmark S&P 500 was up 0.4 per cent.

European stocks traded lower after several central banks lifted interest rates in the region more than investors had expected.

The region-wide Stoxx Europe 600 gauge ended the day 0.5 per cent lower, while France’s CAC 40 and London’s FTSE 100 both dipped 0.8 per cent.

The moves came after the Bank of England lifted its rate by a more than expected 0.5 percentage points to 5 per cent, a day after official data pointed to UK inflation remaining higher than forecast.

The Swiss National Bank raised its main policy rate 0.25 percentage points to 1.75 per cent, and did not rule out additional increases. Norway’s central bank lifted its key rate from 3.25 per cent to 3.75 per cent and said it could raise it again in August.

“We are seeing a slew of central bank decisions today that send the message that inflation continues to be a threat, and [they] are continuing to take that very seriously,” said Joel Kruger, market strategist at LMAX Group.

“The implication is that inflation needs to be dealt with even at the expense of growth, potentially, so we are seeing less investor-friendly reactions from central banks globally,” he added.

Elsewhere, Turkey’s central bank raised its benchmark one-week repo rate to 15 per cent from 8.5 per cent, in a sharp turnround from the low-rate policies pursued by President Recep Tayyip Erdoğan. The smaller than expected rate rise pushed the lira to another record low against the dollar, down more than 5 per cent at almost 24.89.

Trading was muted in Asia as stock exchanges in China and Hong Kong are closed on Thursday and Friday for the Dragon Boat Festival.