US Treasuries rebound from multi-decade yield peaks as European fiscal jitters spark safe-haven rush

A relentless sell-off in global bond markets drove US and European borrowing costs to multi-decade highs on Thursday, before a sudden rush for safe-haven assets triggered a rebound in US Treasuries.

The intense market volatility reflected deepening anxiety over inflation, driven by the conflict between the US and Iran. With Brent crude climbing back above $101 a barrel, investors spent much of the day dumping government debt on expectations that central banks will keep interest rates higher for longer to suppress rising prices.

During the height of the rout on Thursday, the yield on 10-year US Treasuries jumped to 5.34 per cent, its highest level since 2002. In the UK, the yield on 30-year government bonds touched 6 per cent for the first time since 1998, putting further pressure on Chancellor John Healey ahead of his first budget. Stock markets also plunged, with London's FTSE 100 dropping 1.7 per cent in its steepest one-day fall since May.

Why the bond sell-off reversed

The dramatic turnaround in the US bond market was sparked not by American economic data, but by escalating fiscal and political anxiety in Europe. France, in particular, became the focal point of investor concern.

The yield on 10-year French government bonds rose to 4.96 per cent. More tellingly, the premium investors demand to hold French debt over safer German benchmarks widened by up to 22 basis points—the sharpest daily increase since 2012. At the same time, the yield gap between Italian and German two-year debt nearly doubled to 55 basis points, its largest single-day jump since 2020.

This sudden European stress prompted fund managers to seek safety in US Treasuries. Because bond yields fall when prices rise, this safe-haven buying pulled the yield on two-year US Treasuries down by as much as 13 basis points to 4.75 per cent.

Cool US data and interest rate bets

The recovery in Treasuries was further supported by signs of cooling in the US economy. A softer-than-expected manufacturing report led traders to scale back their expectations of how aggressively the Federal Reserve will raise interest rates in the coming months.

Comments from Federal Reserve Vice Chair Philip Jefferson added to the calmer mood. He suggested that policymakers may need more time to evaluate their next move. Following his remarks, traders priced in only a one-in-four chance of an interest rate hike later this month.

Fiscal deficits and the buyers' strike

Despite the late-day recovery, underlying structural worries about government borrowing remain unresolved. Analysts point to a growing "buyers' strike", where institutional investors are reluctant to step back into the bond market until yields stabilize.

The volume of debt being issued to fund government deficits is a primary concern. In Washington, the Trump administration attempted to soothe the market by buying back $6 billion of longer-dated bonds maturing in 10 to 20 years. However, the intervention did little to halt the broader upward march in yields earlier in the session.

Investors are now looking ahead to the upcoming US payroll data for clearer signals on the path of the US economy and the Federal Reserve's next policy steps.