A global bond sell-off deepened on Thursday after stronger-than-expected US business activity data fueled bets on further Federal Reserve rate hikes, pushing five-year Treasury yields above 5% for the first time since 2007. The move rattled UK gilts and Japanese government bonds and is weighing on share prices worldwide.
Five-year US Treasury yields broke above 5% for the first time since 2007 on Thursday, as a sell-off in government bonds deepened following a surprisingly strong reading of US business activity. Ten-year Treasury yields also surged past 5%, marking their biggest one-day move since Donald Trump's 'Liberation Day' tariff announcement almost 18 months ago.
US activity data fuels the sell-off
The trigger was flash PMI data for September, which showed US business activity expanding at its fastest pace in more than five years, according to Swissquote senior analyst Ipek Ozkardeskaya. New orders grew at the fastest pace since April 2022, while manufacturing hiring was the strongest since February 2021.
A weak auction of US five-year bonds attracted low demand overnight, pointing to waning appetite for Treasuries. According to Chris Weston, head of research at Pepperstone: "The Federal Reserve will therefore be firmly on notice."
Rate-hike bets climb
Traders are now pricing in a 55% chance that US rates will be half a percentage point higher by the end of December, according to CME Fedwatch data, implying two quarter-point increases on top of this month's hike. Deutsche Bank strategist Jim Reid said futures are pricing a 71% chance of a Fed rate hike at the October meeting.
The 10-year Treasury yield jumped 15.2 basis points yesterday, its biggest one-day rise since the market turmoil around the Liberation Day tariff announcement in April 2025, Reid said.
Selloff spreads to UK and Japan
The bond market rout is not confined to the US. UK 10-year gilt yields jumped 1.8% toward their highest level since the 2007 financial crisis, a move that erodes the government's fiscal headroom. Rachel Reeves left successor John Healey a buffer of over £23bn to stay within the fiscal rules, but the Financial Times reported the government may now accept a smaller buffer rather than raise taxes.
In Japan, the 10-year government bond yield rose 10 basis points to 3.075%, its highest since 1996, while five- and twenty-year yields each gained about 10 basis points to 2.375% and 3.915% respectively. These moves are pulling down share prices worldwide.
Source: Business | The Guardian
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