US government debt sold off on Thursday as investors priced in more aggressive policy tightening by the Federal Reserve this year after chair Jay Powell said that a jumbo interest rate increase would be considered at the central bank’s May meeting.

Powell, in a panel discussion at the IMF on Thursday said that it was appropriate to move “a little more quickly” in the central bank’s fight against inflation, and explicitly said that a 0.5 percentage point interest rate increase was on the table in May.

The futures market has priced in a 0.5 percentage point increase at each of the next three meetings in May, June and July. The market is betting that the Fed’s policy rate will be 2.7 per cent by the end of this year, from a little over 0.25 per cent today.

The two-year Treasury yield, which moves with interest rate expectations, blew past the three-year high it hit on Wednesday to reach 2.73 per cent, its highest level since December 2018.

The 10-year Treasury yield, a benchmark for borrowing costs worldwide, rose to a high of 2.95 per cent, before retracing some of that move.

“The Fed really and truly is committed to combating inflation. And that is their singular focus right now,” said Gregory Whiteley, a portfolio manager at DoubleLine Capital. “The whole board has moved hawkish.”

The sell-off in rates pulled stocks lower as bets on higher borrowing costs tempered upbeat earnings reports from Tesla and American Airlines.

The S&P 500 trimmed gains earlier in the session to close 1.4 per cent lower on the day, while the technology-heavy Nasdaq Composite dropped 2.1 per cent. The latter gauge had closed 1.2 per cent lower on Wednesday after a drop of more than one-third for Netflix hit other streaming companies.

Tesla’s shares closed up 3.3 per cent after the group topped analysts’ expectations, with revenue more than doubling year on year for the latest quarter at $18.7bn.

Shares in American Airlines rose 3.8 per cent after Robert Isom, chief executive, wrote in a letter to employees that demand was “as strong as we’ve ever seen”, noting that the company expected to be profitable in the second quarter.

Hedge funds helped push equities higher earlier this week, as they sought to unwind negative bets. They were net buyers of North American equities on Tuesday, according to a note sent to clients by Morgan Stanley’s prime brokerage unit.

Elsewhere, short-term government borrowing costs in the eurozone shot to an eight-year high after central bank officials said they could raise interest rates as soon as July.

The yield on Germany’s two-year bond — a benchmark for the entire euro area that closely tracks expectations of the European Central Bank’s interest rates — climbed as much as 0.15 percentage points to 0.19 per cent, its highest level since 2014. Longer-dated bonds were also hit, with Germany’s 10-year yield adding 0.09 percentage points to reach 0.94 per cent.

Luis de Guindos, ECB vice-president, said in an interview with Bloomberg that the central bank’s first interest rate rise since 2011 could come as soon as July. His colleague Pierre Wunsch said in a separate Bloomberg interview that the ECB could lift policy rates above zero before the end of 2022, bringing eight years of sub-zero rates in the eurozone to an end.

The shift in communication has shaken markets that, as recently as the start of the year, were expecting the ECB to move more slowly in tightening monetary policy than its counterparts in the UK and US.

“Four months ago, [ECB president Christine] Lagarde said it was very unlikely that they’d raise rates in 2022 and now we have . . . governors speaking about a rate hike in July,” said Bastien Drut, chief thematic macro strategist at CPR Asset Management. “Everything has changed.”

In the UK, short-term government bonds were also under pressure, with the two-year gilt yield rising to 1.74 per cent, its highest level since 2008.

In European equities, the regional Stoxx 600 gauge closed 0.3 per cent higher.

Additional reporting by Laurence Fletcher

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