Two-year Treasury yield hits 17-year high after strong retail sales figures

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Short-term Treasury yields jumped to their highest level in 17 years on Tuesday as stronger-than-expected US retail sales data breathed new life into a global bond rout.

The two-year Treasury yield, which moves with interest rates expectations, rose 0.09 percentage points to 5.20 per cent, its highest level since 2006. The selloff came after the latest signs of US consumers’ resilience fanned investors’ fears that the Federal Reserve could lift borrowing costs further in its fight against inflation.

The 10-year Treasury yield, a benchmark for financial assets around the world, climbed as much as 0.15 percentage points to 4.85 per cent, near a recent 16-year high struck as worries over “higher for longer” interest rates rocked global debt markets.

The renewed sell-off ends a period of respite for bonds over the past week as the outbreak of war between Israel and Hamas spurred demand for safe assets such as Treasuries.

“The US retail sales data was super strong, no wonder yields have bounced back,” said Peter Schaffrik, global macro strategist at RBC Capital Markets. “I guess after Israel lots of people bought the market and have again been long and wrong. It appears that in the greater scheme of things [the conflict] doesn’t look that likely to really impact the US or European economy.”

Tuesday’s commerce department figures showed that US retail sales rose 0.7 per cent in September, more than analysts had forecast, extending a recent series of strong economic data.

Swaps markets are now pricing a roughly 50 per cent chance of a further Fed rate rise by the end of the year, compared with 37 per cent on Monday. Investors are also expecting fewer rate cuts by the end of 2024 than they had been.

“The data between the last [Fed] meeting and now has been a blowout payrolls number, strong core CPI and strong retail sales,” said Eric Winograd, senior economist for fixed income at AllianceBernstein. “If you’re the Fed and you are truly data-dependent, how are you not going to raise rates?”

On Thursday Fed chair Jay Powell will speak at the Economic Club of New York, at which he may give insight into officials’ thinking ahead of the central bank’s next meeting in two weeks.

Government bond yields in Europe followed the US Treasuries higher. Ten-year German Bund yields — the eurozone’s borrowing benchmark — rose 0.1 percentage points to 2.88 per cent. Italian yields climbed 0.16 percentage points to 4.92 per cent.