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Treasury yields rose to their highest level in 16 years and global stocks sank on Wednesday as nervous investors weighed up signs of US economic resilience to higher interest rates.
Benchmark 10-year Treasury yields rose 0.07 percentage points to 4.91 per cent, the highest level since 2007, while 30-year Treasury yields rose 0.06 percentage points to 5.01 per cent.
On Wall Street, the benchmark S&P 500 and tech-heavy Nasdaq Composite both fell 0.8 per cent. The region-wide Stoxx Europe 600 lost 1 per cent.
The moves will revive worries that last month’s bond market rout has further to run, and come after data on Tuesday showed stronger than expected US retail sales in September.
“People don’t want to hold bonds because of the uncertain outlook with regards to inflation,” said Lyn Graham-Taylor, a senior rates strategist for Rabobank.
Global stock markets were also rattled on Wednesday after an explosion at a hospital in Gaza threatened to derail diplomatic efforts to de-escalate the war between Israel and Hamas.
Investors turned to haven assets, such as gold, which rose 1.2 per cent to its highest level since July, and the dollar, which rose 0.3 per cent against a basket of peers.
The recent string of stronger than expected data has dulled the impact of comments from several Federal Reserve officials, who over the past week have suggested that the policy debate is slowly shifting away from how high rates may need to rise to how long they need to be held at their current level.
“The better the economic data, the more that markets will then act to further tighten financial conditions,” said Charlie McElligott, an analyst at Nomura. The surprising strength of the US economy — despite rates being between 5.25 per cent and 5.5 per cent, their highest level in 22 years — “only increases the certainty of a harder-landing recession”, he added.
Growing concerns over the US government’s near $2tn annual budget deficit, which were exacerbated by Fitch Ratings decision in August to cut the US debt rating, have only added to upwards pressure on yields, investors said.
JPMorgan said its clients had suggested the Fed may need to raise rates to “at least” 6 per cent to sufficiently cool the jobs market and ease consumer spending.
“Hiking at the November meeting would be the ultimate pain trade. We are not seeing clients positioning [or] hedging for that outcome,” the bank said.
UK government debt also sold off sharply after UK inflation held steady in September at 6.7 per cent. Ten-year gilt yields added 0.12 percentage points to 4.65 per cent and rate-sensitive two-year gilts rose to 5 per cent.
However, some investors warned against over-interpreting a single day’s moves.
Daniela Russell, head of UK rates strategy at HSBC, said: “Gilts have performed very strongly cross-market of late, and we had a bit of an upside surprise on the inflation data, as well as quite a bit of supply from both the [Debt Management Office and Bank of England quantitative tightening sales] this week.”
