Bond yields fuel market worries

Investors kept a watchful eye on US markets today as a major sell-off of treasury bonds added to fears of rising interest rates.

Major exchanges have suffered in recent days with the Dow Jones Industrial Average down more than 100 points overnight and London’s FTSE 100 Index under pressure earlier today.

The sell-off of US Treasury 10-year bonds pushed yields to their highest level in more than five years, and investors fear the surge could add to the long-term cost of borrowing through higher interest rates.

Some experts said that the fears in the US market could hit stock markets buoyed by high levels of merger and acquisition activity in recent months.

Hargreaves Lansdown head of equities Richard Hunter said: “Higher bond yields will make borrowing more expensive for corporates – the cost of money could go up across the board and dampen M&A.”

Traders had been buying bonds – a more secure investment than shares – in anticipation of interest rate cuts from the US Federal Reserve later this year, but are now selling out as more positive economic data is likely to stop the Fed from cutting rates until the middle of next year.

The former Federal Reserve chairman Alan Greenspan also said yesterday that he expected bond yields to rise even higher, further unsettling the market.

Last week the European Central Bank raised interest rates to 4.25% – hinting at a further rise to come – while in the UK economists also expect another hike in interest rates to 5.75% by August.

Last week a leading investment bank, Morgan Stanley, added to stock market concerns by predicting a 14% correction in equity markets in the next six months.

The bank said one of the most prominent risks to the market was rising interest rates despite a healthier economic outlook and buoyant merger and acquisition activity.