Stocks and bonds took a hit on Friday as investors’ concerns over government borrowing and inflation intensified. The sharp rise in borrowing costs for consumers and companies added to the unease in the market. Stronger-than-expected data on the labor market released on Friday further fueled worries that the economy is running at a solid pace, leading to fears of inflation and reducing expectations of further rate cuts by the Federal Reserve.
The yield on the 10-year U.S. Treasury note, a key indicator for corporate and consumer loans, saw a significant increase of 0.17 percentage points for the week. This move was particularly notable as the 10-year yield reached its highest level since late 2023, when similar concerns about government spending arose. The rise in borrowing costs was also reflected in the 30-year mortgage rate, which hit its highest level since early July.
The S&P 500 index experienced a 1.9 percent decline for the week, with most of the drop occurring on Friday as the bond market turmoil spread to other sectors. The dollar continued its upward trend, driven by expectations of higher interest rates in the U.S. compared to other markets. In the U.K., worries over the country’s borrowing needs led to a sell-off in government bonds, with the yield on the 10-year note rising significantly.
Seema Shah, the chief global strategist at Principal Asset Management, noted that the U.S. jobs report added to the challenges faced by global bonds. The rise in yields comes at a time when the Fed has been cutting interest rates, highlighting the complex interplay between short-term and long-term rates influenced by economic expectations.
The jobs report released on Friday indicated continued healthy hiring, reducing the likelihood of further rate cuts by the Fed in the near future. Matthew Ryan, head of market strategy at Ebury, suggested that the Fed may not consider lowering rates until at least June, with the possibility of no rate cuts throughout 2025. This scenario could increase the cost of government borrowing, raising concerns about debt sustainability.
The U.S. government recently raised $119 billion in the bond market through auctions of three, 10, and 30-year notes. This added to a wave of companies and governments seeking to raise capital at the beginning of the year, with investors demanding higher yields in response. Ian Lyngen, an interest rate strategist at BMO Capital Markets, highlighted the global nature of the issue, with worries about deficit spending and increased treasury and gilt issuance affecting markets worldwide.
In conclusion, the recent turmoil in the bond and stock markets reflects investors’ concerns over government borrowing, inflation, and the pace of economic growth. The interplay between short-term and long-term interest rates, coupled with expectations of future Fed actions, has contributed to the volatility in financial markets. As investors navigate these challenges, staying informed and monitoring economic indicators will be crucial in making sound investment decisions.
