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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 by 0.017 percentage points and reached 4.88%, the highest since 2007, before slightly increasing later in the day. German 10-year Bund yields, a benchmark for the eurozone, also rose, hitting 3% for the first time since 2011 before settling up by 0.03 percentage points. Yields increase as prices fall.
The recent sell-off was initially triggered by the US Federal Reserve’s indication last month that rates would be maintained at higher levels for a longer period of time. It was further fueled by better-than-expected jobs and manufacturing data, as investors incorporated a relatively positive economic outlook.
Analysts caution that these significant movements in recent days could cause harm to certain parts of the financial system.
“It feels like something is going to snap but I’m not quite sure what,” said Chris Turner, global head of markets at ING.
Investors anticipate that US rates will continue to rise as they demand a premium for holding long-term bonds alongside expectations of the Federal Reserve’s rates. Futures markets currently project the Fed rate to be around 4.6% in January 2025, up from 4.1% in early September.
“Surging real rates [yields after adjusting for inflation] and a stronger dollar are impacting risk assets,” wrote analysts at Barclays. “Without some intervention in the bond market, equities will face challenges.”
Among longer-dated 30-year government bonds, gilt yields saw one of the largest increases on Wednesday, rising by 0.02 percentage points to 5.08%, coming very close to the peak level of 5.14% during last year’s liability-driven investment crisis before slightly declining.
Analysts attribute the rise in gilt yields to the global bond sell-off. “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.
Some analysts suggest that the increase in yields also poses a risk of pushing the global economy into a recession. “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 significantly since mid-September. The spread over Treasuries for CDS contracts of 100 companies with junk-rated debt has exceeded 5 percentage points, up from under 4.25 in mid-September.
“It’s heading back to levels seen around March during the US regional banking crisis,” Turner said.
Concerns over large spending plans and borrowing requirements in the US are also contributing to the rise in yields.
Matthew McLennan, co-head of global value at First Eagle Investments, stated that a sizable budget deficit in the US has distorted markets and overshadowed the impact of higher rates.
“That could be a significant risk to markets given that the dollar is a reserve currency,” he said.
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