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US Treasury yields climbed to a 16-year high on Monday, as a global bond rout resumed following a brief reprieve at the end of last week.
The benchmark 10-year Treasury yield rose 0.13 percentage points to 4.70 per cent, the highest level since 2007, after better than expected manufacturing data bolstered investors’ belief that the US economy is in good shape.
Bond prices around the world have fallen sharply in recent weeks amid an avalanche of Treasury issuance by the US government and a growing belief among investors that central banks will have to hold interest rates at a high level for an extended period. Yields move inversely to prices.
Signs of robust growth in the US make rate cuts from the Federal Reserve over the coming years less likely, hitting Treasuries, analysts said.
“The market is taking every strong data print as an indication that the landing won’t be as hard as it initially thought,” said Gennadiy Goldberg, head of US rates strategy at TD Securities.
Factory activity, as measured by the ISM manufacturing index, contracted by the smallest amount in nearly a year in September, a recovery from multiyear lows hit in June.
The 10-year Treasury yield hit its multiyear high in mid-morning New York trading and hovered around that level for much of the day.
European bonds were also swept up in Monday’s sell-off. UK 10-year yields climbed to 4.58 per cent, while yields on 30-year gilts rose above 5 per cent for the first time since the UK’s pensions crisis last autumn.
Yields on German 10-year debt — the eurozone’s benchmark — rose by 0.08 percentage points to 2.93 per cent, close to a 12-year high struck last week.
“Obviously the growth has been weaker in Europe but by some measures the underlying inflation has been more stubborn,” said Robert Tipp, head of global bonds at PGIM Fixed Income, explaining that there was a “paradigm shift” of investors accepting that interest rates would remain at elevated levels.
In an interview with the Financial Times on Monday, European Central Bank vice-president Luis de Guindos dismissed talks of imminent rate cuts, warning that the recent jump in oil prices to a 10-month high would “make our task more difficult”.
Monday’s moves mark the end of a shortlived recovery in bond markets. Yields had fallen from their recent highs late last week, helped by the latest signs that inflation is falling on both sides of the Atlantic.
“Investors have to be dragged kicking and screaming to the truth,” Tipp said. He noted that markets have been reluctant to believe the Fed’s projections for rates to be kept high and have continued to price in cuts for next year.
In the futures market, traders are betting that interest rates will be at 4.7 per cent by the end of 2024, implying two or three cuts from the current range of 5.25 to 5.5 per cent. Earlier this month, traders in that same market were betting the Fed would cut interest rates four or five times by then.
The moves in the Treasury market are also happening as the US government issues more debt and while foreign buyers have pulled back. The Treasury department in August boosted the size of its quarterly borrowing plans for the first time in two and a half years, planning to issue roughly $1tn in the quarter.
