Short-term Treasury yields jumped to their highest level in 17 years on Tuesday as stronger-than-expected US retail sales data breathed new life into a global bond rout.
The yield on the two-year Treasury, which is based on interest rate expectations, increased by 0.09 percentage points, to 5.20 percent, its highest since 2006. The selling came after investors were alarmed by the latest signs that US consumers are resilient. They feared the Federal Reserve would raise borrowing costs in order to fight inflation.
The yield on the 10-year Treasury, which is a global benchmark for financial assets, has risen by as much as 0.15 percentage point to 4.85 percent, nearing a recent high of 16 years, as concerns about “higher interest rates for longer” rocked debt markets around the globe.
The new sell-off of bonds ends a respite period for bonds that lasted over the last week, as the war between Israel and Hamas sparked demand for safe assets like Treasuries.
Peter Schaffrik is a global macro strategist with RBC Capital Markets. He said, “The US retail data was very strong. No wonder yields are rebounding.” I guess that after Israel, many people bought the stock market and were again long and wrong. In the grand scheme of things, it doesn’t seem likely that the conflict will have a significant impact on the US or European economies.
The Commerce Department figures released on Tuesday showed that US retail sales increased by 0.7 percent in September. This was higher than the analysts’ forecasts, and continued a string of positive economic data.
Swaps are now pricing in a 50% chance of another Fed rate hike by the end the year. This is up from 37% on Monday. Investors also expect fewer rate reductions by the end 2024.
“The data since the last [Fed] meetings has shown a strong core CPI, a strong payrolls number and booming retail sales,” said Eric Winograd. He is a senior economist at AllianceBernstein, focusing on fixed income. If you’re the Fed, and you are really data-dependent how can you not raise rates?
The Fed’s Jay Powell is scheduled to speak Thursday at the Economic Club of New York. He may provide some insight into the thinking of officials ahead of the next central bank meeting, which will be held in two weeks.
The yields of European government bonds followed the US Treasuries upward. The benchmark yield for eurozone borrowing, the German Bund 10-year bond, rose by 0.1 percentage point to 2.88 percent. Italian yields rose 0.16 percentage points, to 4.92 percent.