A strong US payrolls report on Friday raised concerns the Federal Reserve might hasten to increase interest rates to stem inflation, compounding a bond market rout that pushed the yield on the benchmark 10-year Treasury note to a four-year high.
Global bond yields have been rising on expectations of improving global growth and speculation of reduced stimulus from overseas central banks. The spike in yields rattled stock markets this week on worries about the impact of rising borrowing costs on consumers and companies.
"Right now, everyone is a bit nervous," said Gemma Wright-Casparius, senior portfolio manager at Vanguard in Malvern, Pennsylvania. "We are seeing a global sell-off in rates." While traders appear more upbeat on economic prospects outside the United States, domestic business activities have remained solid with signs inflation is edging closer to the Fed's 2 percent target.
Some Fed officials have been reluctant to raise rates further without evidence of an acceleration in inflation, while others felt conditions are ripe for the Fed to further tighten policy. The Labour Department said on Friday that employers hired an additional 200,000 workers last month, more than the 160,000 they added in December. More importantly, average hourly earnings grew 0.3 percent, bringing the year-over-year increase to 2.9 percent, the biggest annual rise since June 2009.
The encouraging wage figure lifted a gauge of investor expectations on inflation to its highest level in almost 3-1/2 years. The yield premium on regular 10-year Treasury notes over 10-year Treasury inflation protected securities grew to 2.14 percentage points, the most since September 2014, according to Reuters and Tradeweb data.
San Francisco Fed President John Williams said on Friday that more rate increases are warranted as the economy has showed more improvement, but he did not favour increasing rates more than the three hikes the Fed has forecast for 2018. Interest rates futures implied growing bets the US central bank will raise rates three times this year. The yield on the benchmark 10-year Treasury reached a four-year peak at 2.852 percent. It was last at 2.841 percent, up 6.8 basis points on the day, marking five consecutive weeks of increases for the longest such stretch since late 2016.
The 2-year yield touched a more than nine-year high at 2.186 percent before ending lower to 2.145 percent on a bout of safe-haven buying. The S&P 500 and the Dow both scored their worst weeks in two years. The yield curve further reversed its earlier flattening move tied to expectations that inflation would stay muted. The yield spread between 2-year and 10-year Treasuries widened to 69 basis points, the most since mid-November after hitting a decade low nearly a month ago. "Yields can go higher, but I don't think they are going to stay there," said Rich Piccirillo, senior portfolio manager at PGIM Fixed Income in Newark, New Jersey.
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