The yield on US Treasuries of 30 years hit its highest level in 16 years on Tuesday as a global sell-off on bond markets sent equities falling and currencies like the yen, rouble and yuan into a tailspin.
The 30-year US yield has reached 4,95% for the first since 2007, just before the financial crises, as the markets adapted to the prospect of a prolonged period of high rates of interest and the government’s vast borrowing requirements.
As a sign that the selling off has had a global impact, borrowing costs in Germany and Italy have also reached their highest level for over a decade.
The stock markets on both sides fell, the yen briefly broke Y=150 per dollar and the Russian rouble weakened beyond 100 per US currency.
The sell-off of bonds followed an impressive run of economic data, and a signal from the US Federal Reserve indicating that they would keep rates “higher longer” in order to dampen demand and complete their job of eradicating inflation.
Padhraic G Garvey is the managing director of ING. He said: “It’s a bond markets selling off due to an underlying macro-resilience and we can see that through higher real rates.”
The manufacturing data this week was better than expected. According to Tuesday’s data, the number of job openings in the US for US workers also rose unexpectedly.
The 30-year yield rose by 0.15 percentage points, while the benchmark 10-year increased by 0.12 percentage points and reached 4.8 percent. Expectations that US interest rates will remain higher have boosted the dollar, heaping pressure on other currencies.
After finance minister Shunichi Suzuki stated that the authorities are watching the market urgently, the yen recovered after it breached the politically sensitive level of Y=150.
The rouble fell below 100 per dollar despite Russian efforts to stop the currency’s fall by increasing interest rates sharply.
Stocks and bond have also been affected by the shift in the US $25tn bond market.
The 30-year German yield, which is closely watched by investors, rose 0.077 points to reach 3.211 percent. This was its highest level in 2011 while the Italian 30-year bond yield also reached its highest since 2012.
Garvey stated that “there’s some anxiety” about Italy’s projected budget deficit, but added: “I do not think this is a scream crisis. . . The market is not in panic but focuses on the risks.”
The 30-year gilt yield in the UK reached a record high of 5 percent this week. It was the highest since Liz Truss’s disastrous “mini” Budget, which she presented after the former Prime Minister’s resignation. However, it fell back to 4,99 per cent by Tuesday.
Stock markets have weakened. The Nasdaq Composite, which is dominated by tech, was down over 2 percent in New York’s afternoon trading, on course for its largest one-day decline in two months. Meanwhile, the S&P 500, a broader index, fell 1.6%. The Stoxx 600, a regional index for Europe, fell by 1.1 percent.
The volatility in the debt markets has affected equity by increasing the returns investors can lock-in by purchasing bonds instead of stocks.
After the Fed’s meeting in September, the bond selling has increased. The central bank made it clear that they intend to keep rates higher than expected next year and 2025.
The futures market is betting that US benchmark rates, which are currently between 5.25 and 5.5 percent, will be cut by two or three times before the end of 2019. Before the Fed meeting traders had assumed that there would be four or five rate cuts.
Both sides of the Atlantic are also experiencing a rise in yields due to government borrowing requirements.
Jim Leaviss is the fund manager of M&G Asset Manager. He said that “the US has a budgetary deficit of 7 percent — this is a very high number for [a] period without recession.”
Bond yields must rise when governments demand and need more money.
The US Treasury had planned to borrow about $1tn during the three-month period ending in September. This was the first time in the past two and half years that its quarterly borrowing plans increased.