- US bond yields rose across the curve on Wednesday, hitting multi-year highs in the process.
- Strong US economic data was the catalyst with service sector activity improving at the second-fastest pace on record while hiring in the private sector surged in September.
- The lift in US yields helped to fuel strong gains in the greenback. In the past, the combination of higher US yields and dollar has not gone down well in emerging markets.
US bond yields are surging, hitting fresh multi-year or multi-decade highs on Wednesday as strong US economic data fuelled expectations the US Federal Reserve will continue to lift official interest rates in the months ahead.
The yield on benchmark 10-year notes jumped to 3.18%, surpassing the previous year-to-date high of 3.12%. It now sits at the highest level since 2011. Just over a year ago, benchmark yields sat just above 2%.
Longer-dated bonds also sold off with the yield on 30-year debt climbing to 3.33%, the highest level in over four years. Reflecting a growing expectation that strong economic data and a tight labour market will continue to boost inflation, and with it the likelihood of further rate hikes from the Fed, yields on 2-year notes also hit the highest level in over a decade.
With longer dated yields increasing more than shorter-dated securities, the US yield curve steepened with the differential between 10 and 2-year yields lifting to 30.6 basis points, wider than the multi-decade low of 18 basis points struck in late August.
The lift across the US yield curve followed the release of what can only be described as incredibly strong US economic data during the session.
“The move higher in US Treasury yields… [was] triggered by a jump in the September ISM Non-manufacturing print to a new cycle high of 61.6 and the second highest in the history of the series,” said Rodrigo Catril, Senior FX Strategist at the National Australia Bank.
“The employment component of the report rose sharply as well, to its highest level since the survey’s inception in 1997.”
Adding to optimism over the outlook for labour market conditions, separate data on private sector hiring during September was also robust with payrolls increasing by 230,000, according to the ADP National Employment report, the largest increase since February.
“That helped raise expectations for tomorrow night’s payrolls report,” Catril said.
With US unemployment already sitting near multi-decade lows of 3.8%, and with signs that wage inflation is accelerating, the latest batch of US economic data has only acted to boost expectations for inflation and continued rate hikes from the Fed in the coming months.
According to the median FOMC member forecasts offered last month, the Fed expects to lift its funds rate one more time this year, and three times in 2019, significantly faster than the two hikes priced in by financial markets.
On current indications, it looks like the Fed’s outlook is more realistic, at least at this point, helping to explain the market reaction seen on Wednesday.
The spike in US yields helped to support a broad rally in the US dollar, weighing significantly on both the Australian and New Zealand dollar’s which fell by more than 1% for the session.
Higher yields also weighed upon US stocks, particularly defensive lower-yielding sectors, with the Dow, S&P 500 and Nasdaq all closing well off the highs seen earlier in the session.
The lift in US yields was mirrored across most major sovereign bond markets, and will likely be mirrored in Asia when trading gets underway today.
However, in the past higher US bond yields and dollar have generally not been well received by emerging markets across the region, often resulting in weakness in stocks and currencies.
Given the moves seen over the past 24 hours, there’s clearly a risk of a similar scenario occurring today.
“Solid US data releases, higher oil prices and a technical backdrop that suggests there are not a lot obstacles for yields to continue to push higher will have many wondering how far this new push higher can go,” Catril said.
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