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.
Rising wage growth also indicates that the Fed’s hiking cycle will accelerate with small business surveys indicating that pay pressure is mounting.
Rates moving higher in the States could begin to 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.”
Bond yields in Europe also moved higher this week after the ECB signalled that it will alter its guidance to the markets on monetary policy tightening. Some economists have argued that recent jitters on the bond market could spell the end to a bull run spanning three decades.
Elsewhere, Bovis Homesbucked the trend of housebuilders sinking on disappointing sales after its ambitious turnaround under Greg Fitzgerald started to bear fruit.
As part of the strategy revamp, Bovis completed less homes last year but sold them at a higher price.
Rising demand amid historically low interest rates and the supportive Help to Buy scheme have sent housebuilding shares soaring but fears that the new build sector has hit the top of the market as sales at the sector’s heavyweights slow has pulled their shares off recent highs. Bovis finished 16p higher at £11.65 as the rest of the sector started to claw back recent losses.
Apple chipmaker IQE continued to slip off 2017’s lofty highs after City analysts at Deutsche Bank argued that competitors discovering the company’s “secret sauce” could see them snapping at the Welsh’s tech firm’s heels by 2019, weakening its shares 5.3p to 123.7p.
E-commerce acquisition vehicle AIQ’s skyrocketing share price came to a sudden halt on Friday on just its first week of trading Its shares were suspended on the London stock exchange after soaring 1288pc in four days of trading, leaving management bewildered. It told shareholders that it was “not aware of any specific reasons” for the “unwarranted” jump.
Propelled by engineering giant GKN’s 26pc jump, the FTSE 100 nudged up to a third consecutive record close as investor risk appetite on the stock markets started to return as earnings season in the US began.