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The 30-year U.S. Treasury yield hit a 16-year high on Tuesday and German and Italian borrowing costs hit their highest levels in more than a decade as a sell-off in global Treasuries intensified and stocks edged lower.
The U.S. 30-year Treasury yield reached 4.89% for the first time since before the 2007 financial crisis as the market adjusted to the prospect of long-term high interest rates and the government’s huge borrowing needs.
The latest sell-off follows a slew of strong economic data and the Federal Reserve’s signal that it will keep interest rates higher “for an extended period” to curb demand and complete its mission of curbing inflation.
“Bond markets have sold off on underlying macro resilience, which we are seeing in rising real rates,” said Padhraic Garvey, managing director at ING.
Among recent data showing the health of the U.S. economy, manufacturing activity data this week came in better than expected. Demand for U.S. workers also unexpectedly increased in August, data released Tuesday showed.
The 30-year note yield rose more than 0.09 percentage point on Tuesday, while the benchmark 10-year note yield rose 0.07 percentage point and the two-year note yield edged higher.
The shift in the $25 trillion U.S. bond market triggered a global downturn in stocks and bonds.
The closely watched German 30-year government bond yield rose 0.058 percentage points to 3.198%, the highest level since 2011, while the Italian 30-year government bond yield reached the highest level since 2012 at 5.37%.
Garvey said there was “some anxiety” about Italy’s budget deficit forecast, while adding: “I don’t think this is a screaming crisis…” . The market is not panicking, but is focusing on risks. “
In the UK, the 30-year gilt yield topped 5% this week, reaching its highest level since former Prime Minister Liz Truss’ ill-fated “mini” Budget, before falling back to 4.99% on Tuesday .
Stocks were weaker on Tuesday, with the S&P 500 and the tech-heavy Nasdaq down 1.3% and 1.7% respectively shortly after the New York opening bell. Europe’s Stoxx 600 index fell 1%.
Turmoil in debt markets has affected stocks by boosting the returns investors can lock in by buying bonds instead of stocks.
The bond sell-off intensified after the Federal Reserve’s September meeting made clear the central bank’s intention to keep interest rates higher than market expectations next year and in 2025.
Futures market traders are now betting that U.S. benchmark interest rates will be cut two to three times from the current range of 5.25% to 5.5% by the end of next year. Ahead of the Fed meeting, traders expect four to five rate cuts.
Demand for government borrowing on both sides of the Atlantic has also pushed yields higher.
“The U.S. budget deficit is 7%, which is very high in a non-recession period,” said Jim Leaviss, a fund manager at asset management firm M&G.
“When governments ask for and need more money, bond yields have to rise to respond.”
The U.S. Treasury Department plans to issue about $1 trillion in debt in the three months to the end of September, the first increase in its quarterly borrowing program in two and a half years.
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