By Ankur Banerjee, Amanda Cooper, Dhara Ranasinghe and Colin Barr
SINGAPORE/LONDON/NEW YORK, Sept 11 (Reuters) - The global bond rout took a breather on Friday after a widely anticipated U.S. inflation report met economist expectations, pushing up market rate-hike odds while also driving expectations that the Federal Reserve may take a wait-and-see approach.
The respite was good news for Trump administration officials, who had been trying to push down borrowing rates to little effect, with anxiety
centering on the 5% level looming for the benchmark U.S. security.
Treasury Secretary Scott Bessent this week announced an unusual buyback of Treasury securities in a bid to improve market function and presumably lower yields in longer-term bonds. The move failed to ease investor anxiety over yawning U.S. fiscal deficits, a blizzard of corporate and government bond issuance, and the much-discussed $40 trillion debt milestone the nation recently passed.
On Friday, U.S. stock indexes rose 1% or more following news that the Consumer Price Index increased 0.4% last month. In the 12 months through August, consumer inflation advanced 3.4% after rising by the same margin in July.
Treasury yields were mostly lower after rising in the wake of the report, with the 10-year yield off 1 basis point at 4.93%, reflecting relief on the part of investors who had feared a red hot report would set off another bond selloff and force the Fed to boost rates at its meeting next week.
"The market is breathing a collective sigh of relief because consumer price index inflation today did not go above expectations or soar," said Adam Sarhan, chief executive of 50 Park Investments in New York. "The Fed is likely to stay data dependent and monitor the situation because higher energy prices and higher food prices act as an indirect tax on consumers and businesses."
The oil market has risen sharply this week with the acceleration of conflict in the Middle East, but Brent crude was down 3% at $104 after rising to a four-month high above $108 on Thursday. A falling oil price is good for markets broadly because it stands to reduce a tax on consumers and businesses and ease concerns about high inflation that are at the center of the bond selloff.
Sovereign debt sets the benchmark for borrowing costs for companies and other loans, including household mortgages, and higher rates are broadly viewed as likely to slow economic activity. Michael Metcalfe, head of macro strategy at State Street in London, said yields are getting close to the point where they could unleash a selloff in equities.
"We've seen a very long run of risk-taking activity on the part of investors. So we've had 108 consecutive days of investors adding to risk across assets. And that's literally just broken this week," he said.
Investors are demanding higher returns for holding long-term bonds, rather than shorter-dated debt, to account for the uncertainty around interest rates, inflation and growth.
"That will continue to pressure this idea that the officials are trying to lean against it, but the fundamentals haven't changed," Metcalfe said.
Bessent has overseen his department's decision to at least double the size of its buybacks of longer-dated securities to at least $4 billion to stem the increase in 30-year Treasury yields, which are at their highest since 2007 and rising.
He has also indicated he favours using Washington's financial might as a foreign policy tool, this week warning traders not to try their hand at pushing the twin levers of the U.S. financial system — the dollar and Treasuries — too far.
"I am the house," he told an event on Wednesday, when asked about the Treasury's various recent market interventions, most notably the joint action with Tokyo in late July to buy the yen, but without Japan selling U.S. bonds to do so.
WORST WEEK SINCE MARCH
Benchmark 10-year yields for the G7 economies have risen by an average of nearly 19 basis points this week, in their worst weekly selloff since the start of the Iran war.
Two-year yields, which are more sensitive to shifts in expectations for inflation and interest rates, have risen by an average of 22 bps, with those in big energy importers like Italy and Britain increasing the most.
"Once again, it is geopolitical fears driving everything," Deutsche Bank strategist Jim Reid said.
The European Central Bank raised rates on Thursday and warned price pressures could prove lasting.
Rising yields push up mortgage and lending rates for households and businesses and mean cash-strapped governments must spend more just to pay the interest on their debt.
MILESTONE FAST APPROACHING
A sustained break for 10-year Treasuries above 5% is seen by some analysts as a critical line that could make bonds more competitive with stocks, potentially pulling dollars out of equity markets.
Aside from a couple of brief forays above 5% in late 2023 and in 2006 and 2007, the 10-year yield has not spent any meaningful time above that threshold since 2002.
Yields on 10-year Treasury notes rose as high as 4.979%, the highest since late 2023, keeping the mood nervous in other regional markets, before turning lower in the wake of the CPI data.
Japan's 10-year government bond yields rose 6 bps to 2.97%, with the Bank of Japan widely expected to raise rates to a 31-year high next week and possibly signal faster tightening in the future.
In Europe, 10-year German Bund yields have hit their highest since 2011, while French 10-year yields are at their highest since 2008 at roughly 4.46%.
(Reporting by Ankur Banerjee in Singapore, Amanda Cooper and Dhara Ranasinghe in London, Additional reporting by Gregor Stuart Hunter in Singapore, Jiaxing Li in Hong Kong; Editing by Kim Coghill, Andrea Ricci and Philippa Fletcher)
