The topside surprise in the US inflation data saw rate traders scale up their bets for another outsized rate hike by the Fed next week.
Specifically, Fed fund futures traders are now pricing in an almost 80 percent chance that the Fed will raise rates by 75bp next week and a more than 20 percent chance of a 100bp rate hike. The repricing of interest rate bets resulted in a spike in US Treasury yields, with the 2-yr yield, for instance, climbing 18bp to 3.76 percent, its highest level since 2007.
The aggressive moves on the front end saw the US Treasury curve turn even more negative yesterday, with the 10v2 spread falling to -35bp. The stronger-than-expected US inflation data and sharp sell-off in USTs suggest that the headwinds for emerging and frontier market bonds will remain acute in the sessions ahead as traders position for another bold rate hike by the Fed next week.