By Alun John
LONDON (Reuters) -A global bond sell-off continued on Wednesday hurting stocks and boosting the dollar on the back of data the day before showing the U.S. economy is in good health, likely limiting further rate cuts, as well as renewed reports about U.S. tariffs.
The benchmark 10 year U.S. Treasury yield rose 3 bps to 4.71%, its highest since April 2024, building on Tuesday’s 7 bp gain.
The sell-off in bonds on Wednesday increased after a CNN report that U.S. President-elect Donald Trump is considering declaring a national economic emergency to provide legal justification for a series of universal tariffs on allies and adversaries.
This feeds into investor uncertainty, which, say analysts, is already causing a higher “term premia” – effectively the additional yield investors demand on longer dated bonds.
The report, and higher yields also hurt shares, with European stocks last down 0.2% giving back an earlier gain, while U.S. share futures likewise reversed course to trade down 0.2%,.
The dollar gave back early losses against most major currencies to trade higher.
Also sending U.S. Treasury yields higher in recent weeks has been strong U.S. economic data causing investors to scale back their expectations for the size of Federal Reserve rate cuts this year.
Numbers on Tuesday showed U.S. job openings unexpectedly increased in November while the U.S. service sector accelerated last month, suggesting the Fed would be in no rush to cut rates.
“Obviously the big theme of the week is higher U.S. yields, and stronger dollar,” said Samy Chaar, chief economist at Lombard Odier in Geneva.
“The U.S. cycle is an income-growth consumption-led cycle, and when you look at it from that angle it gives a lot of importance to labour markets – for it to continue people need to have a job and incomes, and that’s why the market reacted so much to the (job openings) data.”
“The second theme is the erratic and volatile political comments from across the Atlantic.”
Further U.S. employment data is due this week, with private jobs numbers later Wednesday, but Friday’s non-farm payrolls figures are the most important. Inflation numbers next week are January’s other main data release.
BRITISH SELL OFF
The reaction in British markets on Wednesday was more dramatic than that elsewhere, with the British 10 year gilt yield rising over 10 basis points to 4.79%, its highest since 2008. [GB/]
German Bund yields rose just 4 bps. [GVD/EUR]
The pound fell 1.15% against the dollar to $1.2335 versus a 0.5% fall in the euro to $1.0286. [FRX/]
Domestic British midcap stocks also underperformed, dropping 1.76% versus a 0.4% fall for internationally focused British large caps. (L) (FTMC) (FTSE)
“It seems there’s a lot of negativity around the UK,” said Lyn Graham-Taylor, senior rates strategist at Rabobank
“This increase in yields is increasing the chance of the fiscal headroom falling to nothing so there’s an increased probability of having to raise taxes or cut spending in the next budget.”
Asian stocks had struggled earlier in the day with MSCI’s broadest index of Asia-Pacific shares outside Japan dropping 0.57%.
Chinese markets were again the focus. Onshore blue-chips and Hong Kong were each down 1.7% earlier in the day, but rebounded and closed only just in negative territory as traders digested Beijing’s latest efforts to soothe investor nerves after a stuttering start to the year. [.SS]
In commodities, oil prices rose, on reduced supply from Russia and OPEC members, with Brent crude up 0.27% at $77.26 per barrel, while U.S. West Texas Intermediate (WTI) crude was 0.63% higher at $74.74. [O/R]