Treasuries have already priced in a rate hike and more, with 10-year yields pulling back from peaks seen earlier this week just above 2.5 per cent.
In contrast to the Fed, the European Central Bank only last week extended its asset-buying campaign and moved to purchase more short-term debt.
As a result, the spread between U.S. and German two-year yields is at its widest since late 2005, with Treasuries offering a mouth-watering premium of 191 basis points.
Speculation that a Trump administration will implement more debt-financed fiscal stimulus and cut regulation helped all three major U.S. stock indexes to record highs this week. The Dow ended fewer than 100 points from the 20,000 mark.
Bank of America Merrill Lynch’s latest survey of investors found expectations of global growth at 19-month highs and inflation at the second highest percentage in 12 years.
Fund managers were their most optimistic about corporate profits in more than six years and allocations to bank stocks surged to an all-time peak.
Bulk commodities from iron ore to coal have also benefited from the reflation trade, combined with signs of stronger growth in China. Again, any hint the Fed might step up the pace of tightening could undo some of those gains.
Oil ran into profit-taking following a reported rise in U.S. crude inventories and an estimate that OPEC may have produced more crude in November than previously thought.
U.S. crude futures, which hit a high of $53.41 on Tuesday, were down 60 cents at $52.38 a barrel. Brent crude eased 23 cents to $55.20.
