US yields jump to multi-year highs on Fed tightening bets, bond market turmoil

• US Treasury yields surged on Wednesday, with the revenue of the 10- and 30-year notes breaking past the key 5% level.
• A mix of strong US data, Fed tightening expectatio, and low demand for US Treasuries is boosting yields this week.
• These levels suggest higher borrowing costs for families and businesses, which would threaten economic growth.

US Treasury yields stretched to their highest levels in years on Wednesday, fuelled by a mix of rising expectations of further monetary tightening by the US Federal Reserve (Fed), following upbeat US business activity data and a poor US Treasury bond auction. These levels are consistent with higher borrowing costs in mortgages, credit cards or corporate loans, ultimately posing a significant strain on economic growth. The market has performed a risk-off reaction, weighing on stocks and lifting the US Dollar (USD).

The yield for the 30-year note trades at 5.444% on Thirsday, its highest level in 22 years, and the benchmark 10-year has reached 5.148% for the first time since 2007 after a whopping 20-basis-point jump from Wednesday’s lows. The 2-year yield, which is closely related to Fed monetary tightening expectations, rallied to two-year highs at 4.494% 

Long-term securities have thus crossed the 5% level, considered a psychological threshold, which, apart from driving borrowing costs to unaffordable levels, might prompt investors to move away from stock markets to risk-free government debt. 

Strong US data and weak demand for US Treasuries boosted yields

US yields surged on Wednesday as preliminary S&P Global Purchasing Managers' Index (PMI) data showed strong business activity. These figures, coupled with higher wages and rising costs amid high energy prices, boosted expectations that the US central bank will have to tighten its monetary policy soon to keep the economy from overheating.

Fed Governor Michael Barr confirmed those views later on Wednesday, affirming that “further rate hikes are likely needed to ensure timely return to the 2% inflation.”  

Beyond that, a five-year US Treasury auction drew shockingly poor demand, which, according to MUFG analysts, highlights investor unease around the US rates outlook.

Against this backdrop, MUFG warns that “FX [is] more vulnerable to a carry unwind given how well these trades have done in this incredible low FX vol environment.” In such a shakeout, MUFG expects “high yielders across EM would suffer most while the yen and Swiss franc would outperform,” as investors rotate out of riskier carry positions into traditional safe-haven currencies.