Stocks and bonds fell on Friday as investor concerns over the scale of government borrowing were compounded by signs of stubborn inflation, which led to a sharp rise in borrowing costs for consumers and companies.
Stronger-than-expected data on the labor market released Friday raised concerns that the economy is running at a solid pace, raising inflation fears and dampening expectations of further rate cuts by the Federal Reserve.
The yield on the 10-year US Treasury note, which underpins many corporate and consumer loans, rose 0.15 percentage points for the week, a big move in that market. On Friday, 10-year yields rose to their highest level since late 2023, the last time investors worried about government spending getting out of control.
This week, the 30-year mortgage rate, which typically tracks the 10-year Treasury yield, rose to its highest level since early July. The S&P 500 index fell more than 2 percent this week, its worst decline since November, with most of the decline occurring on Friday as the bond frenzy spread to other markets. The dollar continued its long-term gains as expectations of higher interest rates in the United States maintained their allure for investors around the world, even as yields in other bond markets edged higher.
In Britain, concerns over the country’s borrowing needs contributed to a sharp selloff in the country’s government bonds, known as gilts, with the yield on the 10-year note rising 0.24 percentage points, which is fixed That’s its biggest one-week move yet. one year. In Germany, a benchmark for Europe’s debt markets, yields on 10-year government notes, or Bunds, rose 0.16 percentage points.
“For global bonds, the strength of the US jobs report adds to their challenges,” said Seema Shah, chief global strategist at Principal Asset Management. “The peak of yields has not yet been reached, suggesting additional stress that many markets, particularly the UK, cannot afford.”
Yields rise disproportionately because the Fed is cutting the interest rates it controls. This is because the Fed only directly sets a very short-term rate, which is then filtered through the markets and into longer-term interest rates, such as the yield on the 10-year Treasury. But these longer-term market rates are also influenced by investors’ expectations about where the economy is going, not just where it is now.
Friday’s jobs report showed that hiring continued at a healthy pace, undermining expectations the Fed will ease pressure on the economy by cutting rates again in the near future.
“We believe today’s report all but guarantees that the Federal Reserve will continue to lower interest rates again until at least June,” Matthew Ryan, head of market strategy at financial services firm Ebury, wrote in a note to clients. “Will not consider.” , He said it was “unimaginable that we would see no US rate cuts at all throughout 2025.”
This will increase the cost of the government’s huge borrowing needs, rekindling concerns about debt sustainability, especially if some of the incoming administration’s deficit-increasing policies go ahead as planned.
This week, the US government raised $119 billion in the bond market by auctioning notes maturing in three, 10 and 30 years. That adds to the full list of companies and governments of other countries looking to raise new cash at the start of the year, in response to investors demanding higher yields.
“This is a global story,” said Ian Lingen, interest rate strategist at BMO Capital Markets. “Everyone is worried about deficit spending, more supply, issuing more Treasuries, issuing more gilts.”