By Herbert Lash and Tom Wilson
NEW YORK/LONDON (Reuters) - A rout in government bond markets deepened early on Wednesday with benchmark U.S. yields hitting fresh 16-year highs as investors bet that persistently high interest rates will slow world growth and dampen the appetite for riskier assets.
The Treasury rout later retreated on a cooler-than-expected U.S. private payrolls report that helped stocks on Wall Street rebound from a sharp sell-on Tuesday that had plunged the three main U.S. equity indexes to four-month closing lows.
Growth concerns weighed on crude oil and gold prices, and European equities edged lower for a third day as retailer shares fell on a consumer spending pullback.
The bond rally, whose price moves inversely to yield, was likely short-lived, with the September unemployment report on Friday now the market's next focus, said Kim Rupert, managing director of global fixed income at Action Economics in San Francisco.
"The sell-off has been really dramatic. It's been rapid. It's been huge," Rupert said. "The market was so over-sold that it was looking for a catalyst to rally on and found it in ADP."
Rupert referred to the ADP National Employment Report that showed U.S. private payrolls rose by 89,000 jobs in September, the smallest gain since January 2021.
The yield on 10-year Treasury notes touched 4.884%, a fresh 16-year high in early London trade, while 30-year Treasury yields rose above 5% for the first time since August 2007. [US/]
"ADP is the canary in the coal mine that things are slowing," said Rhys Williams, chief strategist at Sprouting Rock Asset Management in Bryn Mawr, Pennsylvania. "The upcoming job reports are going to be less robust than the previous few months."
The market ignored a survey from the Institute for Supply Management (ISM) that showed the U.S. services sector slowing in September as new orders fell to a nine-month low. But inflation remained elevated and employment slowed only gradually 18 months after the Federal Reserve started raising rates to cool demand.
Market expectations for a rate hike in November slid to a 23.7% chance from 28.2% on Tuesday, according to CME Group's (NASDAQ:CME) FedWatch Tool. Futures showed the Fed's overnight rate staying above 5% through next July, after receding from pricing on Tuesday that kept that level through September 2024.
MSCI's U.S.-centric gauge of stocks across the globe closed up 0.23%, while the pan-European STOXX 600 index fell 0.14%.
Stocks on Wall Street rallied. The Dow Jones Industrial Average rose 0.39%, the S&P 500 gained 0.81% and the Nasdaq Composite advanced 1.35%.
European bonds followed the U.S. rout on Tuesday, with yields on Germany's benchmark 10-year debt rising above 3% for the first time since 2011, before slipping to 2.928%. The country's 30-year yield climbed to another 12-year high before pulling back.
Even Japan's 10-year yield, which is capped by the Bank of Japan (BOJ), rose 4.5 bps to a decade high despite the BOJ offering to buy $4.5 billion worth of bonds on Wednesday.
Australian, Canadian and British government bond yields have also surged this week.
The moves in bond markets sucked money into the U.S. dollar, which in overnight trade was stronger than the euro. The dollar index, a measure of the U.S. currency against a basket of other currencies, eased 0.38%.
Earlier, MSCI's broadest index of Asia-Pacific shares outside Japan sank to 11-month lows, shedding 1.1% for its second straight daily drop of more than 1%.
U.S. yields in real terms - subtracting inflation - are also at almost 15-year highs, in part because their move has not come with much of a shift in market gauges of inflation expectations.
THE DOLLAR'S MARCH
The yen was on the stronger side of 150 per dollar on Wednesday, after an unexpected but short-lived surge in the previous session stoked speculation that Japanese authorities may have intervened to support the currency.
The Japanese currency had breached the 150-per-dollar level on Tuesday before suddenly shooting to 147.3. There was no confirmation from Tokyo, where Japan's finance minister and top currency diplomat have made no direct comment on the move.
The yen last stood at 149.01 per dollar. [FRX/]
The dollar's march pushed the euro to its lowest in 10 months at $1.0448 overnight and sterling to a seven-month trough at $1.20535.
The euro last traded at $1.18, up 0.5% on the day. The pound was up a similar amount at $1.212.
"For now, the FX market is a bystander," said SocGen strategist Kit Juckes, "watching Treasuries and waiting for them to break something."
Fed officials see rising yields on long-term U.S. Treasury debt as not triggering alarm bells yet.
Oil prices tumbled by more than 5% following reports that Russia may lift its diesel ban in coming days and U.S. government data that indicated weak demand for gasoline.
U.S. crude futures fell $5.01 to settle at $84.22 a barrel, while Brent settled down $5.11 at $85.81.
Gold prices crept lower for the eighth consecutive session as elevated Treasury yields amid expectations that the Fed will keep rates higher for longer weighed on investor sentiment.
U.S. gold futures settled 0.4% lower at $1,834.80 an ounce.