(News Bulletin 247) – The yield on the 10-year US Treasury bond has crossed 4.8% and is now only a stone’s throw from 5%. In Germany, the yield for the same maturity exceeded 3% for the first time in twelve years.

After the weakness of the Chinese economy, this is the new major source of market tension: the rise in bond rates, particularly in the United States.

At the start of the session this Wednesday, the yield on the 10-year US Treasury bond crossed 4.8% on Tuesday and is moving this Wednesday morning around 4.857%, its highest level in 16 years. In Germany, the 10-year German Bund rate now exceeds 3% at 3.007%, a first since 2011. Remember that the value of bonds moves in the opposite direction to yields.

“We risk repeating ourselves every day, but the last 24 hours have seen the relentless sell-off in bonds continue, with yields reaching new multi-year highs on both sides of the Atlantic,” notes Deutsche Bank.

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Deficit and resilience

Tuesday’s increase was explained by an increase in job openings in August in the United States, to 9.61 million units, against 8.82 million anticipated by economists, which showed that the labor market was “more resilient” than expected.

“For the markets, this means that a further increase in interest rates from the Fed is not in question,” continues Deutsche Bank.

The rise in rates “can be attributed to the resilience of the American economy and also to the persistence of high public deficits. This translates into the anticipation of relatively high key rates from central banks for longer than expected,” summarizes Sebastian Paris Horvitz, from LBPAM.

But it is not so much the level of rates – for information the 10-year yield had exceeded 15% in the 1980s – as the speed at which they rise which is worrying. At the end of July, the 10-year bond rate was still below 4%…

“If rates continue to rise as they are, there will be a financial crash. Something will break and the Fed will move in the other direction (towards lowering rates, editor’s note),” said Monday evening on Bloomberg TV David Lebovitz, global market strategist at JP Morgan Asset Management.

Towards rates of 7%

JPMorgan CEO Jamie Dimon raised the possibility that the 10-year US bond rate would exceed 7%, urging businesses and households to prepare for such an eventuality.

As John Plassard of Mirabaud notes, Rick Santelli, a former trader turned journalist at CNBC, spoke of “a worst-case scenario”, where bond yields would climb to the point of being around 13% in the next decade, in depending on certain conditions.

In any case, these increases in bond yields are weighing on the risk appetite in the markets currently.

“These movements are starting to worry all asset classes,” said at Bloomberg James Wilson, fund manager at Jamieson Coote Bonds Pty in Melbourne. “There is a buyers’ strike going on at the moment and no one wants to go ahead of rising yields, even though oversold levels are quite high.