Global bonds and the dollar track US yield surge

London —A rise in US treasury yields to their highest levels since mid-2011 pulled global bond yields higher across the board and boosted the dollar on Thursday, while stocks sagged in response.

An influential survey of the US services sector showed activity at its strongest since August 1997, sparking speculation that the payrolls report on Friday could also surprise.

Comments from US Federal Reserve chair Jerome Powell who said the economic outlook was “remarkably positive” and that rates might rise above “neutral” also helped the yield on the US 10-year treasury climb to 3.18% on Wednesday.

Yields extended those gains on Thursday, having spiked to 3.2325% overnight, posting their steepest daily increase since the shock outcome of the US presidential election in November 2016.

Markets are expecting an 80% probability of a Fed rate rise in December, said Jasper Lawler, head of research at London Capital Group. “The markets are re-assessing how far the Fed’s tightening cycle will go and expectations are for rate rises to continue for longer,” he wrote in a note.

The rise in US yields helped lift yields across Asia and Europe in response, while shares in emerging markets slipped. Higher US yields are anything but favourable for emerging markets as they tend to draw away much-needed foreign funds while pressuring local currencies.

MSCI’s broadest index of Asia-Pacific shares outside Japan skidded 1.7%, with South Korea, the Philippines, Indonesia and Taiwan all down. Even the Nikkei eased 0.3%, as rising yields offset the boost to exporters from a weaker yen. E-mini futures for the S&P 500 also lost 0.4% in Asian trade, while European stocks opened down 0.6%.

Eurozone bond yields rose sharply, tracking their US counterpart, while the “trans-Atlantic spread” between US and German 10-year bond yields hit a three-decade high of around 275 bps. Germany’s 10-year bond yield, the benchmark for the region, hit a four-and-a-half-month high of 0.55% before settling at about 0.53%, still up six basis points on the day.

“If the Fed is to hike rates beyond the neutral level, the underlying case is that the economy is doing very well — and if the US economy is doing very well, that has spillover effects for the eurozone,” said DZ Bank analyst René Albrecht.

“This will make it easier for the European Central Bank (ECB) to raise rates in 2019; and you will see this impact yields in the eurozone, especially at the long end,” he added.

The exception of the day was Italy, where borrowing costs dropped for a second day, after the government said it would cut budget deficit targets from 2020 and reduce its debt over the next three years. Prime Minister Giuseppe Conte on Wednesday confirmed a deficit target of 2.4% of GDP in 2019 and said this would fall to 2.1% in 2020 and 1.8% in 2021.

The estimates for 2020 and 2021 were lower than those initially reported, bringing further relief to bond markets rattled by the new government’s plans to ramp up spending. Italy’s two-year bond yield was last down two basis points at 1.19%.

In currencies, the dollar was near a six-week high against a basket of peers, holding most of its gains on the back of Thursday’s US services sector survey.

Oil prices slipped from four-year highs, pressured by rising US inventories and after sources said Russia and Saudi Arabia struck a private deal in September to raise crude output. Brent eased 0.1% to $86.20 a barrel on Thursday, while US crude also fell 0.1% to $76.35 a barrel.

Gold prices moved in a narrow range, last trading up 0.2% at $1.199.43 an ounce.

Reuters