US government bonds sell off after tumult in Britain’s gilt market

US Treasury yields rose on Monday after high volatility in the UK gilt market and a lackluster sale of new government bonds hit investor sentiment.

The yield on the 10-year US Treasury bond, a measure of the global cost of borrowing, rose 0.19 percentage points to 3.88 percent during afternoon trade in New York – the highest since 2010.

Monday’s selling followed a brutal session in London that saw gilt yields soar for a second straight trading day after the UK government’s plans for big tax cuts spooked investors. UK 10-year gilt yields rose by the most in 40 years on Monday, according to data from Refinitiv.

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A sell-off in two-year US Treasuries on Monday also highlighted how fund managers are asking for higher borrowing costs to buy debt as they expect the Federal Reserve to raise interest rates sharply.

Line chart of 10-year Treasury yield (%) showing U.S. Treasury yields skyrocketing

According to Thomas Simons, money market economist at Jefferies, the yield differential between what investors expected before the auction and the actual result was the widest since the market turmoil in 2020. The bond also came with the highest yield of any biennial auction since 2007 4.29 percent spent, Simons said.

“On the one hand, the yield seems to represent a compelling value. . . but this crazy volatility is hard to take,” he added.

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Last week, the Fed led a string of rate hikes by other global peers, delivering a third straight hike of 0.75 percentage points to a target range of 3 to 3.25 percent.

The dollar, which tends to strengthen during times of economic and market stress, rose 0.8 percent against a basket of six peers to hit a fresh 20-year high.

European corporate bond markets also reflected concerns about the impact of rapidly rising interest rates. Borrowing costs for high-yield European issuers reached 7.5 percent in March 2020, according to the ICE BofA Euro High Yield Index, the highest level since the beginning of the coronavirus pandemic.

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In stocks, Wall Street’s broad S&P 500 fell 0.6 percent after losing 4.7 percent over the previous week. The tech-heavy Nasdaq Composite was little changed on Monday.

The regional Stoxx Europe 600 stock index fluctuated between positive and negative territory throughout the day before ending down 0.4 percent. The regional gauge ended Friday’s session in “bear market” territory — typically defined as a decline of 20 percent or more from a recent high. The FTSE 100 ended flat.