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Yields on long-term US government debt were on Thursday close to hitting their highest level since 2007 as investors increased bets that the Federal Reserve would successfully deliver a soft landing — avoiding a recession, while keeping a lid on inflation with higher rates.
The sell-off in bonds — yields rise as prices fall — was mirrored in European markets, where UK 10-year gilt yields hit their highest level since 2008 and Germany’s equivalent hit levels not seen since 2011.
Central banks on both sides of the Atlantic have maintained a hawkish stance even as inflation pressures have eased, leading investors to worry that the Fed and others are unlikely to let rates fall any time soon.
“It feels like we’re making a case for a real market break from the post-financial crisis period when rates were kept low for so long,” said Alan Ruskin, strategist at Deutsche Bank. “People had felt that the 10-year was a buy any time the yield rose near 4 per cent but now that’s being challenged and they’re sitting on meaningful losses.”
Yields on benchmark 10-year Treasuries reached 4.3257 per cent, up 0.07 per cent on the day and just shy of October’s 4.3354 per cent intraday high. However, measured on a daily basis — using a single reference price as many fund managers do — they reached 4.3237 per cent, their highest level since November 2007.
Until this month, yields on 10-year notes had struggled to stay above 4 per cent — a level common before the 2008 financial crisis, but not since.
“It’s surprising that 10-year US yields have spent so much time below 4 per cent recently,” said Robert Tipp, head of global bonds for PGIM Fixed Income.
“Investors are convinced that we are going to go back to a sub-4 per cent environment very soon and I think that expectation is likely to prove unfounded in the years ahead.”
On Wednesday, minutes from the Fed’s last meeting had shown members of the open market committee saw “significant upside risks to inflation, which could require further tightening of monetary policy”.
Yields on 10-year UK gilts rose more than 0.1 percentage points to a high of 4.75 per cent while German Bunds offered 2.71 per cent, up 0.06 percentage points. Norway’s central bank raised its key rate by a quarter-point on Thursday and said it expected it would soon need to tighten policy further.
Dillon Lancaster, portfolio manager at TwentyFour Asset Management, said investors were still debating how central banks would react if they did pull off a “soft landing”.
“The question we’ve been asking is if you get to a situation where inflation is under control and unemployment stays at very low levels — what do the central banks do?” said Lancaster. “Do they keep rates higher for longer and do yields at the long end have to drift a bit higher?”
Rising yields weighed on stocks, with the tech-heavy Nasdaq Composite off 0.6 per cent in afternoon trading while the S&P 500 gave up opening gains to trade down 0.3 per cent.
Earlier, Europe’s region-wide Stoxx Europe 600 closed down for a third consecutive day, off 0.9 per cent, while France’s Cac 40 fell 0.9 per cent and Germany’s Dax gave up 0.7 per cent.
“It doesn’t matter whether you think the Fed will or will not carry through with the lean in the Fed minutes,” said Stephen Innes, managing partner at SPI Asset Management. “The fact is that 10-year yields are soaring, and in the modern-day playbook for stock market operators, that is bad news on multiple levels.”
The dollar followed yields higher and reached a two-month high in the London morning against a basket of its trading partners. Its gains briefly pushed the yen back to ¥145.76 — the Japanese currency’s weakest level since November.
That pushed the yen below the level where the Japanese finance ministry stepped in to support the currency last year, prompting speculation that it could intervene again. On Tuesday, finance minister Shunichi Suzuki said he was watching the market moves “with a sense of urgency”.
Equities in China steadied from a sharp sell-off earlier in the week, with the benchmark CSI 300 up 0.3 per cent, while Hong Kong’s Hang Seng was flat.