US Treasuries hit by biggest sell-off since Lehman Brothers

US Treasuries hit by biggest sell-off in two years

By Richard Milne in London and Michael Mackenzie in New York

Published: December 8 2010

US Treasuries suffered their biggest two-day sell-off since the collapse of Lehman Brothers, following a torrid month that has seen borrowing costs for western governments soar.

Germany, Japan and the US have all seen their benchmark market interest rates rise by more than a quarter in the past month while the UK’s has risen by nearly a fifth.

“You could argue that we are at a new stage where the global cost of capital goes higher and higher,” said Steven Major, global head of fixed income research at HSBC.

The yield on 10-year US Treasuries hit a six-month high of 3.33 per cent on Wednesday, up 0.39 percentage points from Monday and 1 percentage point higher than its October low. Japanese five-year yields also rose the most in two years, while Germany’s benchmark borrowing costs hit 3 per cent. “People are getting out of the market and moving to the sidelines, feeling shellshocked at the speed of the rise in yields,” said David Ader, strategist at CRT Capital.

US 10-year yields have risen by about 0.76 percentage points since November 8, those of Germany by 0.62 percentage points, the UK by 0.53 percentage points and Japan by 0.29 percentage points as the prices of the bonds has fallen.

Yields are still relatively low compared with long-term trends but investors are starting to fret that they could continue to move sharply higher. “Yields at this level are clearly unsustainable,” said Paul Marson, chief investment officer at Lombard Odier, the Swiss private bank.

The market moves came after President Barack Obama agreed with Congressional Republicans to extend Bush-era tax cuts and combine them with a $120bn payroll tax holiday. But investors and traders were divided over whether that was sufficient to explain the recent global spike in yields.

The primary explanation is that growth expectations have increased because of better economic data and the “second stimulus” provided by the US government. But others argue it could be due to fears that the US Federal Reserve will not follow through on asset purchases or because of higher government deficits. “It is probably all three,” said Mr Major.

Germany has suffered from fears it could bear a high cost for bailing out troubled eurozone countries. Stock markets in Germany, the UK and Hong Kong all fell on Wednesday.

Copyright The Financial Times Limited 2010. You may share using our article tools. Please don’t cut articles from FT.com and redistribute by email or post to the web.

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