FxWirePro: Bonds in decline as U.S. economy gathers momentum

The U.S. bond market is undergoing a major selloff since yesterday with yields reaching multi-year highs, as the latest batch of strong economic numbers sparked inflation concerns amid the possibility of further rate hikes by the U.S. Federal Reserve.

On Monday, the Institute for Supply Management (ISM) released its manufacturing PMI, which with an index value of 59.8 suggested that the economy is firing its manufacturing engine and with rigorous strength. Moreover, the institute released its services report yesterday, where the headline index grew for a 104th consecutive month and to 61.6 percent, which is the highest value for the index since its inception in 2008. The report also suggested that business activity, new orders, employment - all growing at a robust pace.

A similar trend was reflected in the ADP employment report, which showed that the economy added 230,000 jobs in September alone, with goods-producing sector adding 46,000 jobs.

With these positive releases, the market is now more confident of the faster path of rate hikes by the U.S. Federal Reserve, which has hiked rates eight times by 25 basis points each since December 2015. The market is currently pricing a ninth-rate hike in December with 81.8 percent probability and pricing the tenth in March 2019 with 55 percent probability.

The flurry of good news, coupled with concerns have triggered major selloffs in bonds with yields spiking higher. The 2-year U.S. Treasury yield reached 2.9 percent, the highest level since 2008, and 10-year treasury yield is at 3.21 percent, the highest level since 2011.