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US Treasury yields surged to their highest level in 16 years on Monday, as the global bond market turmoil resumed after a brief pause last week.
The 10-year Treasury yield, which is used as a benchmark, rose by 0.13 percentage points to reach 4.70%, the highest since 2007. This increase came as manufacturing data exceeded expectations and reinforced investor confidence in the strength of the US economy.
In recent weeks, bond prices worldwide have experienced significant declines due to a large amount of Treasury issuance by the US government and growing expectations that central banks will maintain high interest rates for an extended period. It’s important to note that bond yields move in the opposite direction of prices.
According to analysts, signs of robust growth in the US diminish the likelihood of rate cuts from the Federal Reserve in the coming years, which impacts Treasuries.
“Strong data prints are reducing concerns about a hard economic landing,” said Gennadiy Goldberg, head of US rates strategy at TD Securities.
The ISM manufacturing index reflected a recovery from multiyear lows reached in June, with factory activity in September contracting by the smallest amount in nearly a year.
The 10-year Treasury yield reached its multiyear high during morning trading in New York and remained close to that level throughout the day.
European bonds were also affected by the market downturn on Monday. UK 10-year yields climbed to 4.58%, while yields on 30-year gilts rose above 5% for the first time since the UK faced a pensions crisis last autumn.
German 10-year debt, the benchmark for the eurozone, saw yields rise by 0.08 percentage points to 2.93%, approaching a 12-year high set the previous week.
“Although growth has been weaker in Europe, inflation remains persistent,” stated Robert Tipp, head of global bonds at PGIM Fixed Income. He explained that investors are accepting that interest rates will remain elevated.
In an interview with the Financial Times, European Central Bank vice-president Luis de Guindos dismissed talks of imminent rate cuts, cautioning that the recent surge in oil prices would complicate their task.
Monday’s market movements mark the end of a brief recovery in the bond markets, as indications of falling inflation on both sides of the Atlantic had temporarily lowered yields.
“Investors have been reluctant to accept the truth,” Tipp noted. Despite the Fed’s projections of high rates, markets have continued to expect rate cuts next year.
In the futures market, traders are anticipating interest rates to reach 4.7% by the end of 2024, implying two or three cuts from the current range of 5.25% to 5.5%. Earlier this month, those same traders expected four or five cuts by then.
The surge in Treasury yields is occurring amidst increased government debt issuance in the US and reduced foreign buyer participation. In August, the Treasury Department expanded its borrowing plans for the first time in two and a half years, aiming to issue approximately $1 trillion in the quarter.
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