US bond sell-off sparks chaos as markets bet on higher rates

A booming US economy triggered a global debt sell-off on Thursday as investors bet on more interest rate rises to come from the Federal Reserve.

The stellar performance of the world’s biggest economy and bullish comments from Fed chairman Jay Powell, sent investors in the $100 trillion bond market rushing to dump US Treasury bonds, pushing their yield or returns to a seven-year high of 3.22% as the price fell.

When yields on Treasuries, seen as the world’s safest bet, rise, the impact reverberates around the world as investors immediately demand returns on other, more risky assets.

Bond trading screens turned red as the benchmark cost of borrowing for a host of nations rose, including the UK, France, Germany and Italy. The FTSE 100 saw its biggest fall for a month as other assets lost appeal.

AJ Bell investment director Russ Mould said: “The Treasury yield is commonly seen as the risk-free rate for investing, so an increase tends to be negative for other asset classes including shares.”

In London bond-like defensive stocks such as tobacco and utility firms were the biggest casualties, with British American Tobacco, which also turned ex-dividend, down nearly 4%. Among the few winners were banks, who typically boost profits as a result of rising interest rates.

The latest sell-off took hold yesterday after much stronger than expected data from the US ahead of closely watched non-farm payrolls data tomorrow as growth is fanned by Donald Trump’s tax cuts. A potential jobless rate of 3.8%, the lowest for nearly 50 years, is fuelling expectations of sharper tightening from the Fed next year. US interest rates stand at 2.25%.

CMC Markets analyst Michael Hewson said: “Powell’s comments that he was very happy with the US economy, and that he could see the current expansion continue for some time, appears to raise the prospect that not only could we see another rate rise in December, but we could well see at least three more in 2019.

“In particular his remarks that we’re a ‘long way’ from neutral have raised the prospect that rates could go quite a bit higher in the next few months.”

Bob Baur, chief global economist at Principal Global Investors, said: “We look for 10-year Treasury yields to hit 3.5 at some point — later this year, early next year — and I think that’s going to be a real problem for stock markets.”