Treasury market under selling pressure as traders mull need for 75 bp Fed rate hike

A wave of selling swept across government debt markets as economists and traders began to openly ponder the very real possibility that the US central bank's next move on interest rates, next 15 June, should be a 75 basis point hike and not 50bp.

At one point during Monday's session, yields on two-year debt rose above those on 10-year notes for the first time since April in what traders term an 'inversion' of the interest rate curve.

Some argue that may foreshadow a recession although other observers contest that view.

The trigger for the move was the worse than expected reading for consumer prices on 10 June which stoked speculation that the US central bank might need to act a tad more forcefully.

But perhaps what was weighing most on markets was the latest move higher in some gauges of consumers' inflation expectations.

Standard economic theory says central banks should avoid surprising economic agents and financial markets, unless inflation expectations are starting to come unhinged.

In such cases, a forceful surprise can help to assure everyone that the central bank is indeed serious in keeping inflation under wraps.

On the flip-side however, standard economic theory also says that transitory inflation shocks are best looked through.

That of course has been the key debate in markets for some time now, just how transitory is the current inflation shock and is that timeframe perhaps now too long?

But with some economists warning that CPI has yet to peak and with inflation nearing double-digit rates the very real risk is that the Fed is indeed starting to see some of its credibility eroded which in itself may carry very substantial costs

As of 1514 GMT, the yield on the benchmark 2-year note was trading up by 18 basis points to 3.23% and that on the three-year note was 19 basis points higher to 3.42%.