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Bond yields on both sides of the Atlantic fell after hitting their highest levels in more than a decade on Wednesday, as weak U.S. labor market data helped ease investor concerns about “secular higher” interest rates from the Federal Reserve.
The benchmark 10-year U.S. Treasury yield fell 0.03 percentage points on the day to 4.77%, having hit a 16-year high of 4.88% earlier in the day. Germany’s 10-year bund yield – the euro zone’s benchmark – hit 3% in early trade, the highest level since 2011, and was unchanged at 2.95%. As prices fall, yields rise.
Data on Wednesday showed U.S. private sector employers increased hiring at the slowest pace in more than two-and-a-half years as large companies cut jobs, suggesting a cooling labor market ahead of Friday’s official data and bond yields falling. Nonfarm payrolls report.
In the euro zone, retail sales fell at the fastest monthly pace this year in August, suggesting rising borrowing costs are hitting consumer spending.
Despite the recovery in bond markets, analysts have warned that wild swings in recent days could cause damage to parts of the financial system.
“It feels like something is breaking, but I’m not quite sure what,” said Chris Turner, ING’s global head of markets.
The moves follow a sell-off that began after the Federal Reserve insisted last month that interest rates would remain elevated for longer. That trend was then further boosted by a string of better-than-expected employment and manufacturing data as investors digested a relatively benign economic outlook.
Futures markets currently expect the Fed to cut interest rates two to three times by the end of next year, and four to five cuts in early September.
Concerns about massive U.S. spending plans and borrowing requirements also pushed yields higher.
Stocks rebounded Wednesday along with bonds. The Stoxx Europe 600 recovered from its opening losses and was up 0.4% in the early afternoon. On Wall Street, S&P 500 futures contracts opened 0.2% higher.
On the longer-dated 30-year government note, U.S. Treasury yields fell to 4.87%, down from the day’s peak of more than 5%. UK gilt yields initially rose to 5.1%, just shy of their peak of 5.14% during last year’s debt-driven investment crisis, before falling back slightly lower on the day.
Some analysts say yields remain near their highest levels in more than a decade, potentially tipping the global economy into recession. “When yields rise sharply, it creates a potential tax on the economy, which creates headwinds for economic growth,” said Jason Da Silva, senior research analyst at Arbuthnot Latham.
The cost of insuring non-investment grade U.S. corporate debt against default has also risen sharply since mid-September. The spread between CDS contracts and Treasuries for 100 companies holding junk-rated debt has risen to more than 5 percentage points from below 4.25 in mid-September.
“It’s getting back to the levels it was in during the U.S. regional banking crisis in March,” Turner said.
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