Investor interest in US bonds ignited on Wednesday on the back of the increased appetite for riskier assets sparked by an expected decline in the US jobless rate this week to 3.8 per cent, the lowest since 1969.

This growing optimism about the US economy pushed the yield on 10-year US Treasuries, a benchmark for global borrowing, to the highest level since 2011. The rate on 30-year securities reached a four-year high and the greenback gained. 

Federal reserve sign article

There are concerns the US Federal Reserve may tighten too aggressively

US stocks lost most of the initial gains they made earlier on Wednesday, the S&P 500 closing up just 0.1 per cent. A rally in financial-services stocks failed to offset losses in real estate, utilities and consumer staples.

Reduced concern on Italy's fiscal situation this week was the catalyst for the turnaround in sentiment.

The yield on 10-year Treasuries climbed as much as 11 basis points on Wednesday to about 3.18 per cent, beating May's intraday high of 3.1261 per cent. The yield on the 30-years increased by as much as 12 basis points to 3.34 per cent. (Bond prices fall as yields rise.)

The jumps follow the US Federal Reserve increasing interest rates last week. Traders now see a 79.7 per cent chance of the Fed hiking rates by 25 basis points in December, up from 78.5 per cent the day before, according to CME's FedWatch tool.

However, there are concerns the Fed may tighten too aggressively.

"Just the recognition of the Fed saying the [US] economy is good, that means they are not going to slow down any time soon the rate of rate increases," says Mike Baele, managing director of US Bank Private Wealth Management in Portland, Oregon.

"If we were to think about risks to risk assets, rate increases would certainly be at the top of that list. The old adage is 'the Fed raises rates until something breaks'," says Beale.

Excitement in America turned to angst in Australia, with the Aussie dollar initially tumbling almost 1 per cent on the news, to US71.18c, extending its year-to-date slump against the greenback to 8.8 per cent. There was an inevitable widening in the gap between the US 10-year Treasury and its Australian equivalent, to 52 basis points early on Thursday morning.

The yield on US 10-year Treasuries is a benchmark for global borrowing, so the surge may increase the amount Australian banks have to pay for the funds they lend to Australian homebuyers with an unwelcome knock-on effect on house prices.

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Roger Balch is a Morningstar contributor

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