The yield on 10-year US Treasury notes rose to 4 per cent on Wednesday, as traders sold off government debt in anticipation of a longer period of higher interest rates.
The rise took the yield to the highest point since November. Yields late last year were trading at levels last seen more than a decade ago.
The yield on the 10-year note rose 7 basis points to 4 per cent, while the return on the two-year note rose 7bp to 4.89 per cent, building on a 16-year high reached on Tuesday.
Moves in Treasury markets left the yield curve in its steepest inversion in 42 years. An inverted yield curve, in which yields on short-dated bonds are more than those of longer-dated bonds, is often viewed as a harbinger of recession.
Markets have been driven by the interest rate outlook as the US Federal Reserve has raised borrowing costs to fight inflation. Futures markets on Wednesday indicated the Fed’s main policy rate will peak at about 5.5 per cent in September, up from the current range of 4.5-4.75 per cent.
Expectations have changed drastically over the past month after releases of hotter-than-expected US economic data. Investors at the start of February anticipated rates would peak at just under 5 per cent in the second quarter.
“Everyone is looking at the data and coming around to the view that inflation is expected to be ongoing and growth may be firm. There is uncertainty about where the Fed’s policy may end,” said Robert Tipp, chief investment strategist at PGIM.
“The view has been building in markets, with lots of movement over the past five days,” he said.
The moves in fixed income came as US equities dipped. The blue-chip S&P 500 index was down 0.4 per cent and the tech-heavy Nasdaq shed 0.5 per cent in the New York afternoon following the release of the monthly Institute for Supply Management’s purchasing managers’ index.
The index rose to 47.7 in February, below analyst forecasts, but the report indicated that optimism for manufacturing activity was rising and had rebounded from January.
Investor concerns that global central banks would be forced to keep interest rates higher were heightened by stronger than expected inflation data from Germany, the eurozone’s biggest economy.
German consumer prices rose 9.3 per cent year on year in February, versus forecasts of 9.1 per cent, echoing similar unexpected increases in Spanish and French data earlier in the week.
German bonds sold off, with the yield on 10-year Bunds hitting 2.73 per cent, its highest level since July 2011.
Europe’s region-wide Stoxx 600 index closed down 0.8 per cent, Germany’s Dax fell 0.4 per cent and France’s Cac 40 dropped 0.5 per cent. The FTSE 100 rose 0.5 per cent.
“The German inflation prints have pivoted the narrative away from upbeat growth and more towards elevated and sticky inflation,” said Laura Cooper, senior macro investment strategist at BlackRock’s iShares Emea.
Asian stocks rallied on Wednesday as robust Chinese manufacturing data lifted investor spirits following muted trading the previous day. Hong Kong’s Hang Seng index closed up 4.2 per cent and China’s CSI 300 rose 1.4 per cent.
The figures showed that China’s manufacturing sector expanded at its fastest pace in more than a decade, in an unambiguous signal that its economy was rebounding after the government’s strict zero-Covid policy was lifted.
According to China’s National Bureau of Statistics, the official manufacturing sector purchasing managers’ index was 52.6 last month, up from January’s 50.1 and higher than economists’ expectations of 50.5. The reading was at its highest level since April 2012.
The dollar fell 0.4 per cent against a basket of six peers, while the euro rose 0.7 per cent. Sterling fluctuated after Bank of England governor Andrew Bailey suggested markets were wrong to believe many more rate rises would be necessary to tame inflation.