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End of ultra-cheap funds as US borrowing costs hit nine-year high

Tim Wallace
Rising inflation means bond markets anticipate more interest rate hikes under incoming Fed chair Jerome Powell - Barcroft Media

US borrowing costs are rising rapidly, as markets anticipate more Fed rate hikes to stop the surging economy from overheating.

Two-year government bond yields rose to above 2pc for the first time since 2008, indicating the era of cheap money is well and truly coming to an end. That is up from a low of 0.15pc in 2011 and from 1.2pc a year ago.

The catalyst for the latest rise was an increase in core inflation, which accelerated from 1.7pc to 1.8pc in the 12 months to December, though the headline rate slid from 2.2pc to 2.1pc.

Price rises are expected to continue picking up in the months ahead.

Economists believe higher price rises indicate the economic resurgence is growing in strength and needs to attract more attention from the Fed, which is in the process of gradually raising interest rates and reining back the assets bought under quantitative easing.

“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.

Rising wages also indicate the Fed will hike rates further, with Wal-mart increasing its starting wage from $9 per hour to $11, and small business surveys indicating pay pressures are mounting.

As rates rise in the US, this could affect other markets too, including UK government borrowing costs.

“Globally the growth story is fantastic, inflation pressures are rising, market rates are going up and bond yields are going up,” said Mr Knightley.

“That removes some of the cap that has been on gilts, we should be looking for those yields to really push up as well.”