A key section of the U.S. Treasury yield curve inverted to its lowest level in more than two decades on Thursday as investors ramped up bets on the Federal Reserve making aggressive rate hikes after red-hot U.S. inflation data.
Expectations that the Fed would hike by 100 basis points (bps), more than the 75 bps priced in on Tuesday, at its July 26-27 meeting, came after a report showing the annual inflation rate reached a more than 40-year peak in June.
U.S. fed funds futures on Thursday priced in a 81% chance of a 100-bps hike at the Fed meeting later this month compared to around 7% on Tuesday before the inflation data, according to CME data.
"It looks like facts have changed again for the Fed for the July meeting, just as they did in June," said Kenneth Broux, an FX strategist at Societe Generale in London.
"After strong payrolls last Friday and sizzling CPI yesterday, the market is now pricing in 90bp in July and 75bp in September."
The expectations of a steeper rise in interest rates stoked fears of recession and inverted the yield curve further.
The inversion on the U.S. two-year/10-year yield curve accelerated on Wednesday to as much as 27 basis points, the most inverted its has been in more than two decades.
Yields on 10-year benchmark U.S. debt edged higher to 2.985% from 2.90% on Wednesday while yields on two-year debt rose to a three-week high at 3.22%
Atlanta Federal Reserve Bank President Raphael Bostic boosted expectations for the Fed to act more hawkishly, by saying that higher than expected June inflation might require policymakers to consider a 100 basis point increase at their meeting later this month. (Reporting by Saikat Chatterjee; Editing by Simon Cameron-Moore)