Treasury yields reached their highest level in over 16 years on Wednesday, as investors worried about the US economy weighed higher interest rates against signs of resilience.
The benchmark 10-year Treasury yields increased 0.07 percentage points, to the highest level since 2007. Meanwhile, 30-year Treasury rates rose 0.06 percentage point to 5.01 percent.
Wall Street’s benchmark S&P500 fell by 1.3%, while the tech-heavy Nasdaq Composite dropped by 1.6%. Stoxx Europe 600, a regional index, fell by 1 percent.
The move will reignite fears that the bond market turmoil of last month has more to go. Data on Tuesday revealed stronger-than-expected US Retail Sales for September.
“People are not interested in holding bonds due to the uncertainty of inflation,” explained Lyn Graham Taylor, senior rates strategist at Rabobank.
The global stock markets were also shaken on Wednesday, after an blast at a Gaza hospital threatened to derail diplomatic attempts to deescalate war between Israel and Hamas.
Investors flocked to safe-haven assets such as gold which rose by 1.2 percent to its highest level in July and the dollar which gained 0.3 percent against a basket.
The recent string of stronger than expected data has dulled the impact of comments from several Federal Reserve Officials who have been suggesting over the last week that the debate on policy is gradually shifting from how high the rates need to increase to how long they should be held at their present level.
Charlie McElligott is an analyst with Nomura. He said that the better the economic data the more the markets would tighten the financial conditions. He added that the surprising strength of the US economic, despite the fact that rates are at their highest in 22 years (between 5.25 and 5.5%), “only increases certainty of a hard-landing depression”.
Investors said that the growing concerns about the US government’s budget deficit of nearly $2tn, which was exacerbated in August by Fitch Ratings lowering the US debt ratings, has only increased the upward pressure on yields.
JPMorgan stated that its clients suggested the Fed could need to increase rates by “at least” 6% to cool down the job market and ease the consumer spending.
“Hiking during the November meeting will be the ultimate pain.” The bank stated that it does not see clients hedging or positioning for this outcome.
UK government debt was also sharply discounted after UK inflation remained at 6.7% in September. The yields on ten-year gilts increased by 0.12 percentage points, to 4.65 percent. Rate-sensitive two year gilts also rose to 5%.
Some investors cautioned against interpreting too much into a single trading day.
Daniela Russell, HSBC’s head of UK rates, stated: “Gilts are performing very well across the market, and we have had a little upside surprise with the inflation data. We also received a lot of supply this week from the Bank of England and the Debt Management Office.”