Rate Fears Return: Global Bonds Sell Off as ECB Hikes, U.S. Prices Stay Hot

Global borrowing costs jumped on Thursday after the European Central Bank raised interest rates and new U.S. data showed inflation at the wholesale level remained stubbornly high. The European Central Bank, or ECB, lifted its key deposit rate by a quarter point to 3.5 percent — its highest level in more than two decades. The ECB also signaled that further increases are likely to bring inflation, the pace of rising prices, back down to its 2 percent target. In the United States, the Producer Price Index, or PPI — which tracks the prices businesses pay for goods and services — rose more than economists expected last month. The reading suggested price pressures are still moving through the economy, even after a year of aggressive rate hikes by the Federal Reserve. Investors responded by selling government bonds, pushing yields higher. Bond yields rise when prices fall. The yield on the two-year U.S. Treasury note, which closely tracks expectations for Fed policy, climbed to its highest level since March. Markets now price in a higher chance that the Fed will raise rates again at its next meeting in July, and that it will keep them elevated for longer than previously thought. The moves echo the same worry that rattled markets earlier this year: that central banks may need to push rates even higher — and hold them there longer — to fully tame inflation. Higher bond yields ripple through the economy. They raise borrowing costs for mortgages, credit cards, and business loans, weighing on growth. They also strengthen the U.S. dollar, which can make American exports more expensive abroad. Stock markets fell on the news. The S&P 500 slipped in afternoon trading, while European shares closed lower. The dual signals from the ECB and the U.S. data reinforce a single message for investors: the era of cheap money is not coming back soon.