US government debt prices decline ahead of key inflation data

US government bonds slipped and equities drifted ahead of American inflation data that investors will scrutinise for clues about how long the nation’s central bank can continue with its ultra-supportive policies.

The yield on the benchmark 10-year Treasury, which moves inversely to its price, rose 0.02 percentage points to 1.693 per cent in European trading on Tuesday.

This yield, which sets the tone for corporate and household borrowing costs worldwide, has climbed from about 0.9 per cent since the start of the year as traders bet that US president Joe Biden’s multitrillion-dollar economic stimulus schemes will spark more robust price growth.

“US inflation data is the main event that is going to move markets over the next several months,” said Stuart Rumble, multi-asset investment director at Fidelity International.

Economists expect data for March to show consumer prices in the US rose 2.5 per cent compared with the same month last year due in part to a big bounceback in energy prices. The headline gauge registered 1.7 per cent in February. The “core” index, which excludes energy and food components, is expected to tick up to 1.5 per cent, from 1.3 in February.

The US Federal Reserve last year adopted a new strategy for accepting temporary increases in inflation above its 2 per cent target instead of reacting rapidly by tightening monetary policy.

“What we don’t know is much above the target will they tolerate and how long for,” Rumble said. “And when their reaction function kicks in, will they gradually normalise or slam on the brakes?”

The US central bank, which has purchased about $120bn a month of debt securities since March 2020 to support the economy through the pandemic, has signalled it does not expect to raise interest rates until 2024. Senior policymakers have thus far taken a sanguine approach to gently rising inflation, saying that it is a sign of the economic recovery taking hold.

In their last meeting, Fed officials reiterated their view that any increase will be transient before inflation falls back to around the central bank’s preferred rate of 2 per cent next year.

This stance, however, has pitted Fed chair Jay Powell against some investors who predict price rises will be more sustained and have sold off government bonds in anticipation of longer-term rises in inflation that erode the returns on fixed-income securities.

“Markets have brought forward their expectations for Fed rate hikes,” said Jim Reid, strategist at Deutsche Bank, because of “rising inflation expectations that they think the Fed might have to rein in”.

Stock markets were muted ahead of the CPI data. The European Stoxx 600 equity benchmark, which hit a record high last Friday, rose 0.1 per cent in early dealings. London’s FTSE 100 dropped 0.2 per cent. Futures markets signalled the S&P 500, which hit a record high on Monday, would trade flat at the New York opening bell.

In Asia, Hong Kong’s Hang Seng index was flat and Japan’s Nikkei 225 added 0.7 per cent, following trade data that underscored the strength of China’s recovery from the pandemic.

The nation’s exports increased 30.6 per cent in March on a dollar basis while imports surged 38.1 per cent, representing the fastest pace of growth in four years according to data collated by Reuters. This strong signal of rising demand among Chinese consumers helped lift Brent crude, the international energy benchmark, by 0.5 per cent to $63.26 a barrel.

The dollar, as measured against a basket of currencies, ticked 0.1 per cent higher. The euro weakened by 0.1 per cent against the dollar to $1.1893 and sterling was flat at $1.375.