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CAPITAL MARKETS

Primary debt markets on high alert as inflation surges

The rates sell-off is making it more expensive for high-yield and high-grade borrowers to access the bond markets. Maturities on offer are shortening, and it could be about to get much worse.

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On Thursday, the Bureau of Labour Statistic reported that the US Consumer Price Index (CPI) rose 0.6% in January 2022, with big increases in the prices of food, energy and shelter compared with December 2021. That is even higher than consensus expectations and leaves annual inflation running at 7.5%, its highest level since 1982.

Two-year Treasury yields shot up by 21.4 basis points in the aftermath as investors sought to reset expectations for how the Federal Reserve will respond next month.

Talk spread of a possible emergency rate hike before the March meeting of the Federal Open Market Committee (FOMC). There is a growing assumption that it will raise rates by 50bp at the first move and keeping raising by maybe 175bp in 2022.

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Sandra Holdsworth, Aegon Asset Management

Sandra Holdsworth, head of rates UK at Aegon Asset Management, says: “Speculation regarding the outcome of the next FOMC will now run rife. With inflation at these levels and still not expected to have peaked, it’s hard to argue whether 25bp, 50bp or even more is the right response from the central bank.”

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