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US stocks fell the most in a month and treasury bond yields rose sharply as high inflation reading roiled financial markets.
On Wednesday, the S&P 500 fell to session lows in afternoon trading after a 30-year Treasury auction went off at higher yields than anticipated. Two-year yields also rose sharply after data showed the highest annual inflation rate since 1990, upending bets on the timing for the next interest rate hike.
Risks are building for both stocks and bonds as sustained elevated inflation could force the Federal Reserve to taper at a more substantial rate or hike interest rates faster than anticipated. According to Bloomberg, the US consumer price index rose 6.2% in October from a year earlier, beating expectations for 5.9%.
Fiona Cincotta, the senior financial markets analyst at City Index, said: "I think, they can ignore 6.2 per cent on that CPI reading. It's going to be promoting a more hawkish feel."
Treasury Secretary Janet Yellen on Tuesday reiterated her view that the Fed will not allow a repeat of the 1970s-style rate hike. However, traders worry that the latest data may be enough to force the Fed to raise rates as early as June 2022, when it has finished tapering its assets-purchase program.
Seema Shah, the chief strategist at Principal Global Investors, said: "I expect lots of eyeballs were bulging out of their sockets when they saw the number come in. Inflation is clearly getting worse before it gets better, while the significant rise in shelter prices is adding to concerning evidence of a broadening in inflation pressures."
The US five-year breakeven rate on Treasury inflation protected securities rose to a record high. Meanwhile, the yield on the US 10-year notes gained 11 basis points to 1.55%.
Michael Zigmont, head of trading and research at Harvest Volatility Management, said: "I can't explain why the bond market is so content with the current situation, but inflation has been running hot for about a year and the bond market has not panicked. The bond market seems very, very happy with negative real yields. And as long as the bond market is happy, the Fed can be very slow."
What to watch this week:
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