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U.S. Treasury yields climbed to a 16-year high on Monday, resuming a global sell-off that briefly eased at the end of last week.
Better-than-expected manufacturing data bolstered investor confidence that the U.S. economy is in good shape, with the benchmark 10-year Treasury yield rising 0.13 percentage points to 4.70%, the highest level since 2007.
Global bond prices have fallen sharply in recent weeks as the U.S. government sells massive Treasury bonds and investors grow increasingly convinced that central banks will have to keep interest rates high for a long time. Yield is inversely proportional to price.
Analysts say signs of strong U.S. economic growth make it less likely that the Federal Reserve will cut interest rates in the next few years, hitting U.S. government bonds.
“The market views every strong piece of data as a sign that the landing won’t be as difficult as initially thought,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities.
Factory activity, as measured by the ISM manufacturing index, contracted at its smallest pace in nearly a year in September, recovering from multi-year lows hit in June.
European bonds were also hit hard by Monday’s selloff. The 10-year UK government bond yield climbed 0.12 percentage point to 4.56%, while the 30-year UK government bond yield rose above 5% for the first time since the UK pension crisis last autumn, which sent UK government debt into freefall.
The euro zone’s benchmark German 10-year bond yield rose 0.08 percentage points to 2.92%, close to the 12-year high hit last week.
“Obviously, growth has softened in Europe, but by some measures underlying inflation is more stubborn,” said Robert Tipp, global head of fixed income bonds at PGIM. He explained that there has been a “paradigm shift” among investors who accept interest rates. . will be maintained at a high level.
European Central Bank Vice President Luis de Guindos dismissed talk of an imminent rate cut in an interview with the Financial Times on Monday, warning that the recent surge in oil prices to a 10-month high would “make our task much more difficult.” .
Monday’s move marked the end of a brief recovery in the bond market. Yields retreated from recent highs late last week, helped by the latest signs of falling inflation on both sides of the Atlantic.
“Investors have to be dragged kicking and screaming to learn the truth,” Tip said. He noted that the market has been reluctant to believe the Federal Reserve’s forecast that interest rates will remain high and continues to price in a rate cut next year.
In the futures market, traders are betting that interest rates will reach 4.7% by the end of 2024, which means that interest rates will be cut two to three times from the current 5.25% to 5.5%. Earlier this month, traders in the same market were betting that the Fed would cut interest rates four to five times.
The Treasury market has also seen volatility as the U.S. government issues more debt while foreign buyers pull back. The U.S. Treasury Department in August increased the size of its quarterly borrowing program for the first time in two and a half years, planning to issue about $1 trillion in the quarter.
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