US Treasury yields reached a 16-year peak on Monday as global bond markets resumed their rout after a brief respite at the end last week.
The benchmark 10-year Treasury rate rose by 0.13 percentage points, to 4.70 percent. This is the highest since 2007. Investors’ confidence in the US economy was boosted after manufacturing data that exceeded expectations.
In recent weeks, bond prices have dropped sharply around the globe due to an avalanche in Treasury issuance from the US government. Investors are also increasingly convinced that central banks must hold interest rates high for an extended time . Prices and yields are inversely related.
Analysts said that signs of robust US growth make Federal Reserve rate cuts in the future years less likely and will affect Treasuries.
Gennadiy goldberg, head US rates strategy for TD Securities said: “The market takes every strong data print to indicate that the landing will not be as difficult as initially thought.”
The ISM manufacturing index measured the factory activity in September and found that it had contracted the least in almost a year. This is a significant improvement from the multi-year lows reached in June.
The yield on the 10-year Treasury hit a multi-year high during New York morning trading, and remained at that level throughout most of the day.
The sell-off on Monday also affected European bonds. The UK 10-year yields increased to 4.58 percent, and the yields of 30-year gilts reached over 5 percent for the first since the pension crisis in the UK last autumn.
The yields on German 10-year bonds — the benchmark for the Eurozone — increased by 0.08 percentage point to 2.93 percent, nearing a 12-year-high reached last week.
Robert Tipp, the head of global fixed income at PGIM, said that the underlying inflation in Europe has been stubborner. He explained that investors have accepted that interest rates will remain high.
Luis de Guindos, vice-president of the European Central Bank, denied that rate cuts were imminent in an interview conducted on Monday. He warned, however, that recent oil price increases to their highest level in 10 months would “make our job more difficult”.
Monday’s move marks the end of an ill-fated recovery on bond markets. The yields fell from their recent highs in late last week due to the latest signs of falling inflation on both sides.
Tipp stated that investors had to be made to face the truth. Tipp noted that the markets were reluctant to accept Fed projections of high rates and continued to price them in for next year.
On the futures markets, traders bet that interest rates would drop to 4.7 percent by 2024. This implies two or three reductions from the current range between 5.25 and 5.5 percent. In the same market, traders bet earlier this month that interest rates would drop four to five times before then.
As the US government continues to issue more debt, foreign buyers are pulling back. For the first time since two-and-a-half years, the Treasury Department increased its quarterly borrowing plan in August. It plans to issue approximately $1tn during the quarter.