Global bond yields hit multi-year highs as strong US data drives rate expectations

Sovereign bond yields reach multi-year peaks

Government debt sold off across global financial markets as investors adjusted to tighter monetary expectations. Benchmark 10-year US Treasury yields rose over 13 basis points to 5.104%, touching levels as high as 5.135%, marking their highest point since July 2007. The two-year US Treasury yield climbed over 11 basis points to 4.889%, its highest level since May 2024. European and Asian sovereign debt tracked the move, with Japan's 10-year government bond yield rising to 3.08%, its highest level since 1996. In Europe, France's 10-year yield reached 4.66%, an 18-year high, while the yield spread between French and German bonds closed at its widest margin since the 2012 eurozone debt crisis.

This shows growing signs of stress in Europe.

Resilient US business activity fuels rate expectations

The bond market sell-off followed preliminary September Purchasing Managers' Index figures from the United States. The composite PMI rose to 58.4 points from 56.0 in August, reaching its highest level since July 2021. The services PMI increased to 58.7 points from 56.5, exceeding market expectations of 56.0 points. Manufacturing activity also beat projections, climbing to 57.0 points against an expected 53.6 points. Companies in both sectors reported strong inflows of new orders and faster job creation, accompanied by higher input costs and supply bottlenecks. Following the data, derivative contracts priced a probability above 70% for a Federal Reserve rate hike in October, fully discounting three 25-basis-point increases over the next year.

Further policy adjustments will likely be needed to bring inflation down. Economic growth is strong and the labour market is stable, but inflation remains above our 2% target and is not moving towards the target fast enough.

Wall Street pulls back amid cost concerns

US equity markets declined on Wednesday as rising Treasury yields weighed on valuations and investor sentiment. The Dow Jones Industrial Average dropped 0.68% to 51,511.59, the S&P 500 fell 0.75% to 7,706.03, and the Nasdaq Composite fell 1.13% to 26,936.04. Losses were concentrated in utilities, consumer goods, and communication services, with each sector falling by more than 1%. Market participants pointed to persistent price pressures originating in the service sector and elevated production expenses as obstacles to monetary easing.

We have strong corporate earnings, but we also have inflationary pressures and a push-and-pull underway.

Dollar climbs while regional currencies and debt weaken

Rising yields supported the US dollar against major currencies, driving EUR/USD below 1.14 after trading near 1.17 a month earlier. In Poland, the 10-year government bond yield climbed from 6.16% on Tuesday to 6.25% on Wednesday, before reaching 6.33% on Thursday morning. The Polish zloty weakened across the board, with USD/PLN rising past 3.86 PLN, its highest level since April 2025. EUR/PLN breached 4.40 PLN on Thursday morning, reaching its highest level since the turn of 2023 and 2024. Emerging European assets also absorbed geopolitical pressure after a Russian helicopter briefly entered Polish airspace for several dozen seconds, while Brent crude oil recovered to approximately $104 per barrel and gold slipped below $4,300 per ounce.