Stocks and bonds fell on Friday as investors' concerns about the scale of government borrowing were amplified by signs of stubborn inflation and a sharp rise in borrowing costs for consumers and businesses.
Better-than-expected labor market data released on Friday fueled concerns that the economy continues to trend at a solid pace, raising inflation concerns and prompting further interest rate cuts from the US Federal Reserve. Expectations have declined.
The yield on the 10-year U.S. Treasury, which underpins many corporate and consumer loans, rose 0.17 percentage points on the week, a big move in the market. On Friday, the 10-year Treasury yield hit its highest level since late 2023, when investors last worried that government spending would spiral out of control.
This week, the 30-year mortgage rate, which is typically tied to the 10-year Treasury yield, reached its highest level since early July. The S&P 500 Index fell 1.9% for the week, but most of that fell on Friday as the bond turmoil spread to other markets. The dollar continued its long-term rally as expectations for higher U.S. interest rates remained attractive to investors around the world even as yields in other bond markets soared.
In Britain, concerns about the country's borrowing needs led to a sharp fall in government bonds, known as government bonds, with 10-year bond yields rising 0.24 percentage points, on track for their biggest rise in a week. One year. In Germany, the benchmark European bond market, the yield on 10-year government bonds (German Bundestag) rose 0.17 percentage points.
“For global fixed income, the strong U.S. jobs report only adds to the challenge,” said Seema Shah, chief global strategist at Principal Asset Management. “We have not yet reached peak yields, suggesting that some markets, particularly the UK, cannot withstand further stress.”
The rise in yields has occurred disproportionately as the Fed has been lowering its managed interest rates. That's because the Fed directly sets only very short-term interest rates, which are then filtered through the market to set long-term interest rates, such as the yield on the 10-year Treasury note. However, these long-term market interest rates are influenced not only by the current state of the economy, but also by investors' expectations about where the economy is heading in the future.
Friday's jobs report showed hiring continued at a healthy pace, denting expectations that the Fed will need to ease pressure on the economy by cutting interest rates again in the near future.
“We believe today's report all but guarantees that the Federal Reserve will not consider cutting rates again until at least June,” Matthew Ryan, head of market strategy at financial services firm Everly, said in a note to clients. said. . “It's not inconceivable that the U.S. won't cut interest rates at all through 2025,” he added.
That would increase the cost of the government's heavy borrowing needs and reignite concerns about debt sustainability, especially if some of the incoming administration's deficit-widening policies go ahead as planned.
This week, the U.S. government raised $119 billion in the bond market through auctions of bonds with maturities of 3, 10, and 30 years. That set off a ramp-up for companies and other governments to raise new capital at the start of the year, with investors demanding higher yields in response.
“This is a global story,” said Ian Lingen, interest rate strategist at BMO Capital Markets. “Everyone is concerned about budget deficits, increased supply, increased government bond issuance, and increased gold issuance.”
