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Short-term Treasury yields reached a 17-year high on Tuesday following robust US retail sales data, sparking a global bond rout.
Surging 0.09 percentage points to 5.20%, the two-year Treasury yield, which reflects expected interest rates, reached its highest level since 2006. The sell-off was triggered by signs of resilient US consumer spending, raising fears that the Federal Reserve may further increase borrowing costs to combat inflation.
The benchmark 10-year Treasury yield, an influential financial indicator, surged up to 0.15 percentage points to 4.85%, close to its recent peak of 16 years. Global debt markets were rocked by concerns over sustained high interest rates.
The bond market unrest followed a temporary reprieve as the conflict between Israel and Hamas prompted increased demand for safe assets such as Treasuries.
“The US retail sales data was exceptionally strong, which explains the rebound in yields,” commented Peter Schaffrik, global macro strategist at RBC Capital Markets. “It seems that after the Israel conflict, many investors bought into the market and have once again taken the wrong position. In the grand scheme of things, [the conflict] doesn’t appear likely to significantly impact the US or European economy.”
Recent commerce department figures revealed that US retail sales rose 0.7% in September, surpassing analysts’ expectations and extending a streak of robust economic data.
As a result, swaps markets now indicate a roughly 50% likelihood of a further rate hike by the end of the year, up from 37% on Monday. Investors are also anticipating fewer rate cuts by the end of 2024 compared to earlier projections.
“The data between the last [Fed] meeting and now includes strong payroll numbers, robust core CPI, and impressive retail sales,” explained Eric Winograd, senior economist for fixed income at AllianceBernstein. “If you are the Fed and genuinely dependent on data, how can you not raise rates?”
On Thursday, Fed chair Jay Powell is scheduled to address the Economic Club of New York, potentially offering insights into officials’ perspectives ahead of the central bank’s upcoming meeting in two weeks.
Government bond yields in Europe followed the upward trend set by US Treasuries. Ten-year German Bund yields, which serve as the eurozone’s borrowing benchmark, rose by 0.1 percentage points to 2.88%. Italian yields climbed 0.16 percentage points to 4.92%.
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