US borrowing costs hit 16-year high as markets unsettled by jobs data

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Investors sold stocks and bonds across the world on Thursday as US borrowing costs touched a 16-year high, following strong jobs figures that intensified expectations of further rate rises by the Federal Reserve.

Europe’s Stoxx 600 index closed down 2.3 per cent, its biggest one-day drop since March, as the yield on the two-year US Treasury note — which tracks interest rate expectations — reached its highest level since 2007.

The moves came after the US gained 497,000 private sector jobs last month — roughly double economists’ expectations and the biggest rise in more than a year — according to data from ADP Research Institute.

“The global economy will break eventually, and the higher rates go, the bigger the cracks will be,” said Mike Riddell, a bond fund portfolio manager at Allianz.

As the two-year US Treasury hit 5.12 per cent, the benchmark 10-year reached 4.08 per cent, with the sell-off by investors pushing up yields.

On Wall Street, the S&P 500 and the tech-heavy Nasdaq Composite both tumbled more than 1 per cent after the data was released, but recovered to each close 0.8 per cent lower.

The Vix volatility index, popularly known as “Wall Street’s fear gauge”, jumped to a high of 17.1 as investors fretted that a prolonged period of high borrowing costs could soon weigh on the US economy.

London’s FTSE 100 dropped 2.2 per cent, while Hong Kong’s Hang Seng index earlier fell 3 per cent.

Two-year German debt yields, a eurozone benchmark, also jumped, rising 0.07 percentage points to 3.36 per cent, while two-year UK Gilts rose 0.19 percentage points to 5.56 per cent, their highest level since 2008. 

The shifts underscored a growing consensus that the Fed would soon resume rate rises after pausing its tightening campaign in June for the first time in more than a year.

Lorie Logan, president of the Dallas Fed, called on Thursday for an immediate resumption of rate rises.

“If we lose ground in our effort to restore price stability, we will need to do more later to catch up,” she warned. “We have already had a fair amount of time to see the overall effects of monetary tightening.”

The central bank has raised the federal funds rate more than 5 percentage points since early 2022. But according to minutes released this week from June’s meeting of the Federal Open Market Committee, “almost all” officials who participated said “additional increases” in the Fed’s benchmark interest rate would be “appropriate”.

The US labour market has remained extraordinarily strong, despite the Fed’s sustained interest rate rises.

Thursday’s private sector employment data showed big increases in the hospitality and leisure sectors, as well as in construction and transportation.

“This was very, very strong hiring data,” said Ben Jeffery, a US rates strategist at BMO Capital Markets.

He added that some wage data “was encouraging for the Fed, but there is nothing in here that would make them hesitant to hike at the end of the month”.

In contrast to the ADP figures, the government’s own data on Friday is expected to show that hiring growth slowed in June.

Economists polled by Bloomberg have forecast that the labour department will report that the US added 200,000 jobs last month, down from 339,000 in May. However, the median forecast has underestimated jobs data for 14 consecutive months.

Additional reporting by Taylor Nicole Rogers and Colby Smith in New York