Finally, it has happened. The yield on the benchmark 10-year US Treasury note hit the round number of 5 per cent yesterday for the first time in almost four years. The jump almost certainly heralds higher US interest rates across the board - and, in the eyes of many, a return of normality in financial markets.
A combination of strong GDP figures, a buoyant labour market and rising energy costs has convinced investors that US growth is here to stay, and that the central bank will push rates higher again - from 4.75 per cent to 5 per cent - when it next meets on 10 May.
The sell-off in US bonds was mirrored across the world, with yields on German bunds rising to an 18-month high and 10-year gilts in the UK jumping 7 basis points to yield 4.54 per cent. Meanwhile, oil prices also rose higher yesterday, with the benchmark Brent crude price breaking through the $70 a barrel level for the first time to trade at $70.20 in London.
By mid morning, the US 10-year's yield had climbed 5 basis points to 5.03 per cent, up from 4.39 per cent at the start of the year, and the highest since the Federal Reserve began the current tightening cycle in June 2004. Since then, the key fed funds rate has risen in 15 consecutive increments of 0.25 per cent. But longer-term rates have stubbornly refused to follow suit - and at one point actually fell below short-term ones - resulting in what the former Fed chairman Alan Greenspan called the inverted yield curve "conundrum".
Pessimists said it was a sign of impending recession, even of a new era of deflation. Others put the anomaly down to massive foreign purchases of longer-term US bonds, in part because of higher US rates, in part to recycle record US current account deficits ($805bn, or £460bn, in 2005).
But the anomaly now appears to be unwinding unaided. Meanwhile the foreign buying of US bonds may be easing off, as the Japanese and European economies pick up. The risk as always is that a slow disinvestment turns into a stampede out of the dollar. This would force the Fed to push rates up sharply, endangering growth and the precariously poised US housing market.Reuse content