Stocks and bonds tumbled on Friday, as investors’ worries over the scale of government borrowing were amplified by signs of stubborn inflation, extending a sharp rise in borrowing costs for consumers and companies.
Stronger-than-expected data on the labor market released on Friday intensified concerns that the economy continues to run at a solid pace, stoking inflation fears and dampening expectations of further rate cuts by the Federal Reserve.
The yield on the 10-year U.S. Treasury note, which underpins a host of corporate and consumer loans, rose 0.17 percentage points for the week, a big move in that market. On Friday, the 10-year yield hit its highest level since late 2023, the last time investors fretted about government spending getting out of control.
This week, the 30-year mortgage rate, which typically tracks the 10-year Treasury yield, reached its highest level since early July. The S&P 500 index tumbled 1.9 percent for the week, with most of that fall on Friday as the bond tumult spread to other markets. The dollar continued its long-running rise, as the expectation of higher interest rates in the United States maintained its allure for investors around the world, even as yields in other bond markets lurched higher.
In Britain, worries over the country’s borrowing needs contributed to a sharp sell-off in the nation’s government bonds, known as gilts, with the yield on the 10-year note rising 0.24 percentage points, on course for its biggest one-week move in a year. In Germany, a benchmark for Europe’s debt markets, the yield on 10-year government notes, or bunds, rose 0.17 percentage points.
“For global bonds, the strength of the U.S. jobs report just adds to their challenges,” said Seema Shah, the chief global strategist at Principal Asset Management. “The peak for yields has not yet been reached, suggesting additional stresses that several markets, especially the U.K., can ill afford.”
The rise in yields comes, incongruously, as the Fed has been cutting the interest rates it controls. That’s because the Fed only directly sets a very short-term rate, which then filters through markets and into longer-dated interest rates, like the yield on the 10-year Treasury. But these longer-dated market rates are also affected by investors’ expectations about where the economy is headed, not just where it is now.
Friday’s jobs report showed that hiring continued at a healthy pace, dampening expectations of the Fed needing to ease pressure on the economy by cutting rates again in the near future.
“We think that today’s report all but guarantees that the Federal Reserve won’t even consider lowering interest rates again until at least June,” Matthew Ryan, the head of market strategy at Ebury, a financial services firm, wrote in a note to clients. He added that it was “far from inconceivable that we see no U.S. rate cuts at all during the entirety of 2025.”
That would increase the cost of the government’s hefty borrowing needs, rekindling worries about debt sustainability, especially if some of the incoming administration’s deficit-increasing policies go ahead as planned.
This week, the U.S. government raised $119 billion in the bond market by auctioning notes maturing in three, 10 and 30 years. That added to a full slate of companies and other countries’ governments looking to raise fresh cash at the beginning of the year, with investors demanding higher yields in response.
“It’s a global story,” said Ian Lyngen, an interest rate strategist at BMO Capital Markets. “Everyone is worried about deficit spending, more supply, more treasury issuance, more gilt issuance.”
