U.S. Treasury yields hit a peak not seen since the early tremors of the 2007-2008 global financial crisis on Tuesday, as fears of interest rates staying high for longer roiled risk assets globally and drove the dollar to a 10-month high.
Asian and European stock benchmarks sagged, with U.S. equities set to follow suit, and crude oil prices dipped on recent remarks from Federal Reserve officials that drove a bearish steepening of the U.S. yield curve.
The benchmark STOXX index of 600 European shares (.STOXX) slid 0.5%, in line with an earlier fall in MSCI’s broadest index of Asia-Pacific shares (.MIAP00000PUS).
The yield on 10-year Treasury notes rose as high as 4.566%, a 16-year peak, while a hefty pipeline of U.S. treasury auctions this week and fears of a U.S. government shutdown all further stoked the skittish mood.
Bond yields, which move inversely to prices and rise when risks related to the issuer are perceived as growing, remained elevated among euro zone sovereigns as the narrative that central banks will keep rates higher for longer held sway.
Germany’s 10-year government bond yield , the euro area’s benchmark, was last little changed on the day at 2.789%, having briefly hit a 12-year high of 2.813% in early trade.
The gap between the yields on Italian benchmark 10-year BTP bonds and safer German Bunds has risen to around 1.86 percentage points (186 basis points), the widest since late May, as Prime Minister Giorgia Meloni prepares a difficult 2024 budget.
Minneapolis Fed President Neel Kashkari said more rate hikes were likely needed given the surprising resilience of the U.S. economy.
The nervousness around U.S. government debt is exacerbated by efforts from the Republican-controlled House of Representatives to advance steep spending cuts this week, which stand no chance of becoming law but could trigger a partial shutdown of the government by next Sunday.
Hundreds of thousands of federal workers could be furloughed and public services suspended if Congress is unable to fund the new fiscal year starting Oct. 1.
Traders now put the odds of another quarter-point Fed hike by January at a coin toss, and have pushed the likely start of rate cuts to summer.
Chicago Fed President Austan Goolsbee said on Monday that inflation staying entrenched above the central bank’s 2% target remains a bigger risk than tight Fed policy slowing the economy more than needed.
The European Central Bank and Bank of England have also touted higher rates for longer in policy meetings since the middle of the month.
The U.S. dollar index – which measures the currency against six major developed market peers, including the euro and yen – ticked up 0.2% to 106.2, the highest since November 2022, as the world’s biggest economy continued to outperform.
The greenback’s strength against the yen in particular has kept traders on alert for an intervention to prop up the Japanese currency, especially after Finance Minister Shunichi Suzuki on Tuesday said no options were off the table.
The dollar held near an 11-month peak of 148.97 yen from overnight, with 150 per dollar seen by financial markets as a red line that would spur Japanese authorities to act, as they did last year.
Gold drifted slightly lower to $1,910.6, extending its slump from above $1,947 over the past week, as bullion’s appeal dimmed in the shade of the steamroller dollar.
Crude oil remained weak amid concerns that fuel demand would be crimped by major central banks holding interest rates higher for longer, even with supply expected to be tight.
Brent crude futures were down 72 cents at $92.57 a barrel, while U.S. West Texas Intermediate crude futures were trading 69 cents lower at $89.99.
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