U.S. Treasury yields jumped to a three-year high, fueling a global rise in borrowing costs as traders intensified bets on aggressive rate hikes from major central banks.
Ten-year U.S. yields climbed through 2.75% for the first time since March 2019 as investors priced in the impact of the Federal Reserve’s tightening plan and accelerating inflation. Traders are betting the Fed will enact about nine more quarter-point rate hikes by year-end, which would be the fastest policy tightening since 1994.
Short-dated rates in the U.K. hit the highest in more than a decade as money markets ramped up bets on Bank of England rate increases by year-end. German yields rose to the highest in almost seven years.
Meanwhile, France’s 10-year yield premium over Germany fell for the first time in three days. Investors looked past results of the first round of France’s election -- which put President Emmanuel Macron and far-right candidate Marine Le Pen in a second-round runoff later this month -- and turned their attention back to growing expectations for the European Central Bank to end an era of negative rates by December.
“A move this profound from a corner of markets that has such pervasive effects -- from pricing of credit to the determination of ‘risk free returns’ is a cause for major risk re-pricing, one would suspect,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. “I think the impact of such sustained and strong moves in Treasury yields will be hard to dodge for anyone.”
Borrowing costs on European debt surged, with money markets pricing two quarter-point ECB rate hikes by October. The rate on 10-year German bonds surged 11 basis points to 0.82%, the highest since September 2015. Money markets are pricing two-quarter point ECB rate hikes by October, and they are two basis points away from wagering on a third such increase by December. The German yield curve steepened, led by 30-year rates, which surged to the highest since 2018.
“The curve steepening is indeed what you would expect from markets taking a more sanguine view of the French election,” said Antoine Bouvet, a strategist at ING Bank NV.
U.K. debt was also caught up in the rush to bet on further policy tightening ahead of inflation data on Wednesday, sending 10-year yields to a six-year high and affirming trader bets on five quarter-point BOE rate increases at each rate decision through to November. Consumer prices in Britain are expected to jump by the fastest pace in 30 years, according to a median estimate of analysts polled by Bloomberg.
Markets in Asia also felt the impact of Treasury declines, which helped send the dollar past 125 yen for the first time since 2015. They also erased the premium that benchmark Chinese bonds held over their U.S. counterparts for more than decade, narrowing the spread between the two securities to the least since June 2010.
“Dollar-yen looks vulnerable to a move toward 130 if U.S. bond yields continue to push higher and the Bank of Japan remains committed to keeping the 10-year yield at 0.25%,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. in Singapore. “This would put more pressure on other Asian currencies as well.”