The yield on the 10-year US Treasury note rose to 4 per cent on Wednesday, as traders sold government debt in anticipation of another period of higher interest rates.
The rise took the result to the highest point since November. Yields at the end of 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 percent, while the yield on the two-year note rose 7bp to 4.89 percent, building on a 16-year high reached on Tuesday.
The move in the Treasury market left the yield curve in the steepest inversion in 42 years. An inverted yield curve, in which short-dated bonds yield more than longer-dated bonds, is often considered a harbinger of recession.
Markets have been buoyed by the prospect of interest rates as the US Federal Reserve raises borrowing costs to fight inflation. Futures markets on Wednesday indicated the Fed’s main policy rate will rise to around 5.5 percent in September, from the current range of 4.5-4.75 percent.
Expectations have changed dramatically over the past month following the release of warmer-than-expected US economic data. Investors in early February expected rates to rise below 5 percent in the second quarter.
“Everyone looks at the data and sees that inflation is expected to continue and growth may be strong. There is uncertainty about where the Fed’s policy may end,” said Robert Tipp, chief investment strategist at PGIM.
“The scene has been building in the market, with a lot of movement in the last five days,” he said.
The move in fixed income comes as U.S. equities decline. The blue-chip S&P 500 index fell 0.4 percent and the tech-heavy Nasdaq fell 0.5 percent in New York afternoon after the release of the Institute for Supply Management’s quarterly purchasing managers’ index.
The index rose to 47.7 in February, below analysts’ forecasts, but the report showed that optimism for manufacturing activity was rising and had recovered since January.
Investors are worried that global central banks will be forced to keep interest rates higher because of stronger-than-expected inflation data from Germany, the euro zone’s largest economy.
German consumer prices rose 9.3 per cent year-on-year in February, compared to forecasts of 9.1 per cent, reflecting unexpected increases in Spanish and French data earlier in the week.
German bonds sold off, with the yield on 10-year Bunds reaching 2.73 percent, the highest level since July 2011.
The Stoxx 600 index in the European region closed down 0.8 percent, Germany’s Dax was down 0.4 percent and France’s Cac 40 was down 0.5 percent. The FTSE 100 rose 0.5 percent.
“The German inflation prints have pivoted the narrative away from upbeat growth and more toward upward and sticky inflation,” said Laura Cooper, senior macro investment strategist at BlackRock’s iShares Emea.
Asian shares rallied on Wednesday as strong Chinese manufacturing data lifted investors’ spirits after muted trading the previous day. Hong Kong’s Hang Seng index closed up 4.2 percent and China’s CSI 300 rose 1.4 percent.
The figures show that China’s manufacturing sector is growing at its fastest pace in more than a decade, in an unequivocal signal that the economy is picking up again after the government’s 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 percent against six peers, while the euro rose 0.7 percent. Sterling fluctuated after Bank of England governor Andrew Bailey suggested markets were wrongly believing many more rate hikes would be needed to tame inflation.