A sharp selloff in some of the world’s biggest government bond markets and a surge in the dollar are sending shockwaves through financial markets, with the pain seen deepening as uncertainty grows over Donald Trump’s policies.
On Wednesday, 10-year Treasury yields, underpinning trillions of dollars in daily global transactions, jumped to above 4.7%, their highest since April, and UK peers hit their highest since 2008.
This unleashed a fresh wave of selling in currencies, including sterling , which slid over 1%, and the euro headed closer towards the $1 mark.
Central banks all but declared victory over inflation in 2024, but a number of metrics show price pressures are rising again.
Trump’s plans for higher trade tariffs, tax cuts and deregulation threaten to push up inflation and strain government finances, thereby also limiting the Federal Reserve’s scope to cut interest rates.
At 12:03 p.m. ET, the Dow Jones Industrial Average rose 353.08 points, or 0.83%, to 43,085.21, the S&P 500 gained 74.43 points, or 1.25%, to 6,016.90 and the Nasdaq Composite gained 343.99 points, or 1.75%, to 19,965.67.
Automakers rose, with Ford up 1.6% and General Motors gaining 4% after a report said President-elect Donald Trump’s incoming administration is currently focused on imposing universal tariffs, but only on certain sectors deemed critical to national or economic security. However, Trump later refuted the report.
Automobile manufacturers are considered the most vulnerable to tariffs imposed on trade partners of the U.S., given their vast supply chains.
In the lead-up to Trump’s inauguration on Jan. 20, investors are seeking insights into his policies, which are broadly seen as beneficial for corporate America as well as the U.S. economy.
The Russell 2000 index, tracking domestically focused small-cap companies, rose 0.9%.
“If we’ve learned anything over the years, it’s that Trump is unpredictable. He loves shaking up markets, but the final outcomes are often less dramatic than his initial announcements,” ING analysts led by Chris Turner said in a note.
“However, officials and companies shouldn’t get too comfortable. We will only know what’s truly happening once it’s done.”
Eight out of the 11 S&P 500 sectors advanced with tech stocks leading gains, up 2%.
Chipmakers got a boost from Microsoft’s plan to invest $80 billion to develop artificial-intelligence-enabled data centers, as well as Foxconn’s forecast-beating fourth-quarter revenue.
Nvidia gained 4.5%, Advanced Micro Devices added 3.7% and Micron Technology climbed 11.6%. The Philadelphia SE Semiconductor index jumped 3.7% to hit a two-month high.
U.S. stocks rebounded sharply on Friday after a string of losses in December and the first few sessions of the new year, when concerns about high valuations, rising Treasury yields and thin liquidity saw traders pull back after a strong 2024 run.
In a week packed with economic data and speeches from U.S. Federal Reserve officials, investors will look for clues on the pace of monetary policy easing this year. Later in the week, the focus will be on a key monthly payrolls report.
“The start of 2025 was never going to be straightforward considering the torrent of bond supply and policy announcements from the incoming U.S. administration,” Societe Generale strategist Kenneth Broux said.
“Conditions are building for a tantrum in bonds and an overshoot in yields. We’re looking at 5% in 10s,” he added, referring to 10-year yields.
The S&P 500, which rallied post Trump’s win, has started to falter.
Other governments are busy repairing their own finances and shoring up their economies, while ramping up bond sales.
Long-dated yields, which tend to be less susceptible to short-term swings in expectations for monetary policy, have hit multi-year highs globally, partly because of the tidal wave of new bonds this year.
Thirty-year Treasury bond yields have risen 60 basis points in a month - the largest such increase since October 2023. They are now perilously close to 5%, a level rarely seen in the past two decades.
This has pushed the premium of 30-year yields to two-year yields to its highest in nearly three years - a dynamic known as “curve steepening”.
“There’s a big pipeline of bonds that needs to be sold, so that gives you steeper curve as well as a higher term premium in longer bonds. I think that’s one of the main drivers,” said Danske Bank chief analyst Jens Peter Soerensen.
UK 30-year gilt yields have hit their highest since 1998 to around 5.4%, adding to worries about the impact of higher borrowing costs on the British government’s already shaky finances.
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