Yields on long-term US government debt neared their highest level since 2007 as investors bet that the Federal Reserve would successfully avoid a recession although higher interest rates may be required to tackle stubborn inflation.
The sell-off in bonds 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 with higher interest rates even as inflation pressures have eased, leading investors to worry that interest rates will stay inflated for some time to come.
On Wednesday, minutes from the Fed’s last meeting showed officials saw “significant upside risks to inflation, which could require further tightening of monetary policy”.
Ipek Ozkardeskaya at Swissquote Bank explained that positive data in the US recently has fuelled “worries that with such strong growth, the US inflation could only make a U-turn and take a lift”.
“This is why we continue to see the upside pressure in yields persist, in the US and around the world, though we saw some respite in the US 2-year yield that bounced lower from the 5% mark earlier in the week, and the 10-year yield spiked above 4.30% before falling back to 4.25% this morning,” she noted.
She also pointed out “the upside pressure in sovereign yields is true for other parts of the world as well, because obviously when the US coughs the world catches a cold.”
“More precisely, higher US yields also translate into a stronger US dollar, and a stronger US dollar is inflationary for the rest of the world.“
She said “the increasing supply, and the decreasing demand for US sovereigns will be one major force pushing the US yield curve higher.”
“And if the strong economic data translates into higher inflation, the impact on yields will likely be higher,” she added.
“So, yes, the US 30-year yield is at the highest levels since 2011 and that looks appetizing, especially if the risk sentiment sours – due to multiple reasons ranging from geopolitical tensions to China worries – but the downside risks in the US sovereign bonds market prevails,” she said.