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Bond yields on both sides of the Atlantic fell back after touching their highest levels for more than a decade on Wednesday, as weak US labour market data helped ease investors’ concerns over the Federal Reserve’s “higher for longer” message on interest rates.
Yields on benchmark 10-year US Treasuries were down 0.08 percentage points in late afternoon trading in New York at 4.73 per cent, having earlier hit a 16-year high of 4.88 per cent. German 10-year Bund yields — a benchmark for the eurozone — fell to 2.92 per cent, after reaching 3 per cent in early trade, the highest level since 2011. Yields rise as prices fall.
The move down in bond yields came after data on Wednesday showed private sector employers in the US increased hiring at the slowest pace in more than two and a half years as large companies shed jobs, signalling a cooling labour market ahead of Friday’s official non-farm payrolls report.
In the eurozone, retail sales fell at the fastest monthly pace of the year in August, suggesting higher borrowing costs are hitting consumer spending.
Despite the recovery in bond markets, analysts warned that the sharp moves of recent days were likely to inflict damage on parts of the financial system.
“It feels like something is going to snap but I’m not quite sure what,” said Chris Turner, global head of markets at ING.
The moves follow a sell-off that began after the Fed’s insistence last month that rates would be kept higher for longer. It was then further fuelled by a flurry of better than expected jobs and manufacturing data, as investors priced in a relatively benign economic outlook.
Futures markets are now pricing in two or three interest rate cuts from the Fed by the end of next year, compared with four or five cuts in early September.
Worries over large spending plans and borrowing requirements in the US have also pushed yields higher.
Among longer-dated 30-year government bonds, Treasury yields dropped to 4.86 per cent, pulling back from the day’s peak of more than 5 per cent. Gilt yields initially rose to 5.1 per cent, within a whisker of the peak level of 5.14 per cent during last year’s liability-driven investment crisis, before falling back to trade flat on the day.
Yields remain near their highest level in more than a decade, which risks tipping the global economy into a recession, some analysts said. “When yields move up so aggressively, that creates a potential tax on the economy which will deliver headwinds to economic growth,” said Jason Da Silva, senior research analyst at Arbuthnot Latham.
The cost of insuring against default for the debt of non-investment grade US companies has also risen sharply since the middle of September. The spread over Treasuries for CDS contracts of 100 companies with junk-rated debt has risen to more than 5 percentage points from less than 4.25 in the middle of September.
“It’s heading back to levels seen around March during the US regional banking crisis,” Turner said.
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