Treasury Yields Surge as Global Central Banks Scramble to Respond to Fed, Inflation


U.S. government bond yields surged Thursday, after foreign governments and central banks rushed to raise interest rates or otherwise support local currencies pressured by the dollar’s strongest rally in a generation.

U.S. yields were largely stable overnight after the Federal Reserve raised short-term rates by 0.75 percentage point for the third consecutive meeting and said more large rate increases are likely as the central bank seeks to quell inflation. 

But long-term U.S. yields began a sharp ascent shortly before the start of U.S. stock trading Thursday, responding at least in part to several central banks raising rates and Japan, the world’s third-largest economy, intervening in the foreign exchange market to sell dollars and buy yen for the first since 1998.

The moves unnerved investors, who are already contending with the sharp decline in U.S. stock indexes this year and expectations that the Fed’s rate-tightening campaign will inevitably lead to a significant economic slowdown.

As central banks one-up each other, raising rates and taking other aggressive actions, it is generating a high degree of uncertainty about what they will do next, said

Jim Caron,

senior portfolio manager and chief strategist of global fixed income at Morgan Stanley Investment Management.

Investors, he said, are thinking “‘I thought I knew where they were going, but now the sky’s the limit,’ and that’s where you get into this freefall type of mentality.”

Selling of U.S. government bonds sent the yield on the benchmark 10-year U.S. Treasury note to 3.705% from 3.511% Wednesday, according to Tradeweb. That marked its biggest one-day gain since June 13 and highest close since February 2011. Yields rise when prices fall.

U.S. Treasury yields play a critical role in the global economy, setting a floor on borrowing costs for U.S. consumers and business and establishing a benchmark forward-looking return against which other assets are measured.

A historically large climb in yields this year—driven by stubbornly high inflation and escalating expectations for how high the Fed will raise interest rates—has already sent mortgage rates soaring. It also has punished stocks, causing investors to mark down the value of expected corporate profits because they can now get a substantial return by just buying and holding Treasurys.

Thursday’s big jump in yields stands to exacerbate those trends, while highlighting the unpredictable fallout of the current inflationary environment.

Analysts said they couldn’t definitely pin Thursday’s move on one particular event. Still, many said it could be broadly explained by how the Fed’s aggressive interest-rate increases are strengthening the U.S. dollar by encouraging global investors to pull money out of other markets to invest in higher-yielding U.S. assets. 

That trend in turn is putting extra pressure on other countries to defend their currencies as they also fight inflation, and contributing to a race to lift rates around the world.

While analysts said they couldn’t definitively pin Thursday’s move on one particular event, many said it could be broadly explained by how the Fed’s aggressive interest-rate increases are strengthening the U.S. dollar and putting pressure on other countries to defend their currencies as they also contend with inflation.

On Thursday, central banks from Norway to South Africa raised interest rates by larger-than-expected increments. The Bank of England eschewed a 0.75-percentage-point increase in favor of a more conservative half-percentage point but moved ahead with plans to sell its portfolio of U.K. government bonds, contributing to a large increase in U.K. government bond yields.

“You can think of it as a vicious cycle,” Mr. Caron said.

Of particular concern to U.S. investors was the Japanese government’s intervention to support the yen. That move led to speculation on Wall Street that the government might be selling Treasurys to raise the dollars it needed to buy its home currency.

Some analysts expressed skepticism about that scenario, noting that the Japanese government is believed to have large holdings of U.S. cash and cash-equivalents, reducing the need to sell longer-term Treasurys.

“Japan has plenty of cash in its reserves,” said

Brad Setser,

a senior fellow at the Council on Foreign Relations and an expert on global capital flows. It is “not at all clear it needs to sell Treasurys.”

For his part, Japanese Finance Minister

Shunichi Suzuki

declined to comment about the specifics of the intervention, including how many yen Japan bought for dollars and what types of dollar-denominated assets it sold.

“It’s not crazy for people who follow the Treasury market to anticipate in a world where a lot of Asian central banks are intervening, they’re going to be wanting to build up their dollar cash holdings and therefore they’re at the margin tending to sell Treasurys,” Mr. Setser said.

More broadly, some analysts said investors have reason to worry about demand for Treasurys from foreign investors now that U.S. bonds are no longer an outlier in the developed world offering positive returns.     

“Foreign demand for Treasurys has been light this year, ”said Priya Misra, head of global rates strategy at TD Securities in New York. “There’s been a global rise in rates so people don’t need to look to the Treasury market for yield,” 

Ms. Misra argued that a big reason why yields jumped globally on Thursday was that Japan’s foreign-exchange intervention had increased speculation that the

Bank of Japan

would lift its policy aimed at controlling bond yields, even after the central bank’s leader pushed back against that idea on Thursday.

Such a move, she said, would push up Japanese bond yields. That could then lead Japanese investors to sell foreign bonds, including Treasurys, so they could buy Japanese debt instead.

Megumi Fujikawa contributed to this article

Write to Sam Goldfarb at sam.goldfarb@wsj.com

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