Bond yields climb anticipating more Federal Reserve hikes

US borrowing costs are surging as the markets start to price in more interest rate hikes at the Federal Reserve to stop the buoyant economy from overheating.

Two-year Treasury yields jumped over 2pc for the first time in a decade on Friday, indicating that the era of cheap money is finally coming to a close. Yields slumped to a low of 0.15pc in 2011 and were still languishing at 1.2pc a year ago.

Analysts pinned the latest rise on core inflation in the US accelerating ahead of expectations from 1.7pc to 1.8pc year on year in December, even though the headline figure slipped back from 2.2pc to 2.1pc. Prices are expected to continue to pick up in the months ahead.

Economists believe that rising inflation indicates that the economy is growing in strength and that the Fed will soon need to take action. The Fed hiked interest rates three times in 2017 and started to wind down its huge balance sheet but markets currently only expect the Federal Open Market Committee to vote for two rate rises in 2018.

“You’ve got an environment where the US economy is growing at 3pc, inflation we think is also going to be heading towards 3pc, and we are seeing the markets push on with the [Fed] hike expectations,” said James Knightly at ING.

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