Yields on U.S. Treasurys continued to set fresh multiyear highs amid a strong batch of economic data, supporting expectations the Federal Reserve will raise interest rates at its October meeting.
The 10-year Treasury yield rose to as high as 5.165%, the highest since July 2007, before settling at 5.163%. The 30-year yield increased to 5.460%, the highest since June 2004.
The U.S. Treasury Department auctioned $44 billion of seven-year notes which sold at a high yield of 5.085%, the highest since April 1993, as the government's borrowing costs keep rising with investors reluctant to lend money in the long-term in the face of increasing inflation and fiscal uncertainty.
In a buyback operation of long-term bonds, the Treasury on Thursday purchased just $4.1 billion out of a $6 billion maximum it had set the previous day.
Manufacturing activity in the central U.S. accelerated in September, coming close to its pace from June, a according to a monthly survey. U.S. jobless claims also continued to tick down, reinforcing the view that the labor market has held steady.
Meanwhile, new U.S. home sales rose more than analysts expected, but was still lower than the pace of sales seen in August of last year as elevated mortgage rates affect first-time home buyers.
Philadelphia Fed President Anna Paulson said Thursday more Fed tightening may be warranted if conditions evolve as she expects.
"By September, it was clear that the balance of risks had shifted," Paulson said, explaining her vote to raise rates earlier this month. "Underlying inflation showed little to no progress."
New York Fed President John Williams said it is reasonable to expect another rate increase by the end of the year when delivering remarks in London earlier on Thursday.
Yields also rose elsewhere. The 10-year German Bund yield reached 3.612%, its highest level since 2009, and the 10-year U.K. gilt yield hovered around 5.385%.
U.S. oil prices continued to rise, with Brent crude prices climbing more than 4% to $107.87 a barrel, adding to inflation concerns. U.S. natural gas futures rose more than 6%.
Meanwhile, the WSJ dollar index rose to 96.98, its highest since the end of July.
Growing expectations that the Federal Reserve will raise interest rates again are also underpinning strength in the dollar, DHF Capital's Bas Kooijman said in a note.
"Rates are once again at the forefront of investor concerns, as long-term U.S. Treasury yields consolidate around or above the 5% threshold--a level that carries significant psychological weight for the markets," Tikehau Capital's head of capital markets strategies Raphael Thuin said in a note.
"The key question is whether this upward trend can continue and, even more importantly, whether financial markets and the economy as a whole can coexist with higher interest rates for the foreseeable future," he said.
Mohit Kumar, a global economist at Jefferies, said "stop outs and position unwinds" were also a major feature of Wednesday's selling.
"There appears to be a lot of pain on the street in fixed income," Kumar said in a note. "The breakdown in correlation between oil, rates and risky assets suggests that yesterday's move was a dominant position squaring move, rather than driven purely by fundamentals."
The balance of probabilities suggests there is at least one more leg of weakness in long-dated bonds still to play out in the coming months, Padhraic Garvey, regional head of research for the Americas, and Michiel Tukker, senior U.K. and eurozone rates strategist, at ING said.
Paulo Trevisani contributed to this article.
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