Treasury yields surge after US steps up plans to borrow more money

US Treasury yields climbed to a nine-month high, continuing their ascent following an announcement from the government that it would increase its borrowing in the coming months.

The 10-year Treasury yield climbed 0.11 percentage points to 4.19 per cent, extending a rise that began on Wednesday after the US government lifted its issuance target for the coming quarter and strong private payrolls data. Also in the mix, though not necessarily front of investors’ minds, was Fitch’s unexpected downgrade on Tuesday of Washington’s credit rating.

The Treasury said it would boost its issuance of long-term debt this quarter, in order to fill the growing gap between tax revenue and government spending. Yields on 10- and 30-year Treasury bonds have jumped since then.

Yields were also propped up on Wednesday by stronger-than-expected private payrolls data. That fed into the thesis that the US economy might be able to achieve a “soft landing”, which would erode the chances of interest rates and borrowing costs declining sharply any time soon. That could be a negative for risky assets such as stocks.

The US on Friday will publish its closely watched hiring figures for July, which are expected to show that employers added fewer jobs last month.

Investors selling longer dated bonds on Thursday was part of a move “that was set in motion earlier this week by the Treasury’s increased issuance and Fitch’s downgrade of US debt”, said Subadra Rajappa, head US rates strategy at Société Générale.

Piling further pressure on Treasuries, hedge fund manager Bill Ackman said he was shorting US 30-year debt, citing “large deficits as far as the eye can see”.

“It is hard to imagine how the market absorbs such a large increase in supply without materially higher rates,” the Pershing Square chief executive said in a post on X, formerly Twitter.

US stocks closed the day slightly lower. The S&P 500 fell 0.3 per cent, after its biggest one-day drop on Wednesday since April. The Nasdaq Composite gave up 0.1 per cent.

“You’ve got a backdrop where earnings are actually falling and bond yields are going up,” said Paul Jackson, global head of asset allocation research at Invesco. “It’s not necessarily the best environment for stock markets, which, let’s not forget it, had a very good start of the year.”

“I think there is maybe a bit of profit-taking going on that is being helped by the rise in bond yields and the Fitch downgrading of US government debt,” Jackson said.

Europe’s region-wide Stoxx Europe 600 index ended the day down 0.6 per cent, its third successive session of losses. The index has declined almost 3 per cent since the start of the month.

France’s Cac 40 lost 0.7 per cent, Germany’s Dax gave up 0.8 per cent and London’s FTSE 100 fell 0.4 per cent.

In currency markets, sterling fell to $1.2623, its weakest level against the dollar since late June, after the BoE raised its benchmark rate to 5.25 per cent, as expected by the majority of investors.

Falling inflation in the UK allowed the central bank to slow the pace of its tightening campaign after it surprised markets with a larger half-point increase at the previous policy meeting in June.

Yet BoE policymakers left the door open for further tightening at their next meeting in September, as prices in the UK continue to grow at a faster pace than in other large economies.

Earlier in Asia, Hong Kong’s Hang Seng index fell 0.5 per cent, while South Korea’s Kospi lost 0.4 per cent and Japan’s Topix dropped 1.5 per cent.

China’s benchmark CSI 300 was the only outlier in the region, adding 0.9 per cent after fresh data showed that the country’s services activity expanded faster than expected in July. The Caixin services purchasing managers’ index rose to 54.1, well above the forecast 52.4.