US Treasuries tumbled Friday, driving benchmark yields to the highest since 2007, as policy makers signaled their determination to keep raising rates until they are sure inflation is under control.
The yield on US 10-year notes jumped as much as six basis points to 4.29%. That spilled over across global markets, with German bonds slumping to take equivalent yields above 2.5% for the first time since 2011.
“The global inflation bogeyman continues to scare the bond markets,” said strategists at Societe Generale SA including Ninon Bachet. “Central banks have additional big moves to make in their tightening process, so we remain short duration.”
The rapid collective central-banking pivot from stimulus to tightening is placing strains on governments and economies around the world. The resurgence in Treasury yields has also helped fuel dollar strength, driving currencies such as the yen to levels unseen against the greenback in over 30 years.
Federal Reserve officials are likely to raise interest rates to “well above” 4% this year and hold them at restrictive levels to combat inflation, Federal Reserve Bank of Philadelphia President Patrick Harker said on Thursday.
The selloff puts Treasuries on course for a 12-week streak of losses, the longest since 1984, when then-Federal Reserve Chairman Paul Volcker was carrying out a series of rapid rate hikes. It’s a similar picture for German bonds, heading for a record 12-week losing streak.
Swaps traders priced in the highest peak yet for the Fed’s policy rate, projecting it will top out at 5% in the first half of 2023. March and May 2023 overnight index swap contracts each exceeded 5% on Thursday in the New York session. Both were below 4.70% as recently as Oct. 13 before US consumer inflation exceeded estimates.
“This is a kind of milestone,” former US Treasury Secretary Lawrence Summers said on Twitter. The market-implied terminal rate is “more likely than not to rise more.”
Tighter policy expectations also drove the yield on 10-year inflation-protected Treasuries up as much as five basis points to 1.78%, the highest since 2009. That’s feeding through to lower equity valuations as it drags down corporate earnings.
Traders have also been ratcheting up bets on rate hikes from the European Central Bank, seeing an over 90% chance of a 75 basis-point move at its policy decision next week. Money markets expect its key rate to climb up to 3.25% by next summer, driving up euro-area yields.