Treasury yields hit new high as bonds extend losses

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Bond yields on both sides of the Atlantic touched their highest levels for more than a decade on Wednesday as a sell-off in global fixed income continued.

Yields on benchmark 10-year US Treasuries rose 0.017 percentage points and touched 4.88 per cent, the highest level since 2007, before slipping back to trade marginally higher on the day. German 10-year Bund yields — a benchmark for the eurozone — also rose, touching 3 per cent for the first time since 2011 before nudging lower to trade up 0.03 percentage points on the day. Yields rise as prices fall.

The moves deepen a sell-off that began after the US Federal Reserve’s insistence last month that rates would be kept higher for longer. It was then further fuelled by a flurry of better than expected jobs and manufacturing data, as investors priced in a relatively benign economic outlook.

Analysts warned that the sharp moves of recent days are likely to inflict damage on parts of the financial system.

“No one knows when this is going to stop,” said Chris Turner, global head of markets at ING. “It feels like something is going to snap but I’m not quite sure what.”

Investors expect US rates to continue to grind higher as investors require a premium for owning long-term bonds in addition to expectations for the Federal Reserve’s rate. Futures markets now price the Fed rate at about 4.6 per cent in January 2025, up from 4.1 per cent in early September.

“Surging real rates [yields after taking inflation into account] and a stronger dollar hit risk assets,” wrote analysts at Barclays. “Absent a circuit breaker to the bond market, equities will struggle.”

Among longer-dated 30-year government bonds, gilt yields saw one of the largest rises on Wednesday, rising 0.02 percentage points to 5.08 per cent, within a whisker of the peak level of 5.14 per cent during last year’s liability-driven investment crisis, before falling back slightly.

Analysts said gilt yields had been lifted by the sell-off in bonds globally. “Gilts have been unable to resist the pull of higher yields from elsewhere but it’s not really a gilt story — it’s more of a Treasury one,” said Daniela Russell, head of UK rates at HSBC.

The rise in yields also risks tipping the global economy into a recession, some analysts said. “When yields move up so aggressively, that creates a potential tax on the economy which will deliver headwinds to economic growth,” said Jason Da Silva, senior research analyst at Arbuthnot Latham.

The cost of insuring against default for the debt of non-investment grade US companies has also risen sharply since the middle of September. The spread over Treasuries for CDS contracts of 100 companies with junk rated debt has risen to more than 5 percentage points from under 4.25 in the middle of September.

“It’s heading back to levels seen around March during the US regional banking crisis,” Turner said.

Worries over large spending plans and borrowing requirements in the US are also pushing yields higher. 

Matthew McLennan, co-head of global value at First Eagle Investments said that a large budget deficit in the US has distorted markets and drowned out the impact of higher rates.

“That could be a meaningful risk to markets given that the dollar is a reserve currency,” he said.