Investors continued to dump government bonds on Monday amid concerns that a Donald Trump presidency will lead to higher interest rates and inflation.
The yield on the benchmark 10-year Treasury note reached a high of 2.301% Monday, up from 2.118% on Thursday. U.S. government bond markets were shut Friday. Treasury yields, which rise as prices fall, are hovering around their highest level since last December after recording their largest one-week gain in more than three years following Mr. Trump's election victory last week.
Selling has spread across developed world government bond markets, with some investors predicting more to come, as the prospect of higher interest rates in the future makes longer-dated bonds less attractive.
The yield on the 10-year Germany government bond was up above 0.39% on Monday, on track to close at its highest level since January. U.K. government bond yields have retraced to levels last seen in the month before the Brexit vote, which triggered a sharp rally in these securities. Developed-market government bond yields in Asia also jumped. Italian government bond yields jumped to 2.15%, up from 1.96% on Friday.
"Trump's election has been viewed as a game changer, with the potential for fiscal stimulus, pro-business reforms and protectionist measures all being priced in to markets," said Mitul Patel, head of interest rates at Henderson Global Investors.
Mr. Patel warned that unexpectedly poor performance from bond markets has the potential to lead to outflows from the asset class. That in turn "could beget further poor performance, until yields are at a level which offer good risk-adjusted returns going forward again and bring in buyers," he said.
Ten-year Treasury yields have risen by nearly a percentage point since reaching an all-time low in early July.
The recent spike in yields recalls other recent selloffs that lasted several weeks before bond markets steadied. German government bonds led an unexpected move higher in global yields last Spring, before resuming their decline to record low levels this year. In 2013, the Federal Reserve discussion of tapering its asset purchases sent Treasury yields spiraling higher.
The trigger this time has been Mr. Trump's election. While much of his policy agenda remains unclear, the president-elect has promised infrastructure spending and tax cuts.
Analysts say that would boost bond supply, economic growth and inflation, potentially hurting fixed-income assets. Investors are particularly concerned that an increase in signs of inflation and growth could push the Federal Reserve to raise interest rates at a faster clip than previously expected.
Long-term bond yields, in large part, reflect investors' expectations of where short-term interest rates will be in the future. The prospect of higher U.S. interest rates has also lifted the dollar, while expectations of stronger growth has boosted stocks.
Economists have already marked up their growth and inflation projections following Mr. Trump's victory. On average, economists forecast the economy could expand 2.2% in 2017 and 2.3% in 2018 as a fiscal stimulus takes effect, up from about 1.5% over the past 12 months, according to The Wall Street Journal's latest monthly survey. Inflation, meanwhile, is seen at 2.2% next year and 2.4% in 2018.
The likelihood of the Federal Reserve raising interest rates next month rose to 81.1% Friday, according to moves in Fed fund futures tracked by CME Group, up from 71.5% the previous day.
Fixed-income strategists at HSBC, who have long called for lower bond yields, said in a note to clients Friday they were cautious about how many of Mr. Trump's pledges could be delivered. But the bank still increased its 10-year Treasury yield forecast by a percentage point to 2.5% for the first quarter of next year.
Some investors say bond markets may stabilize even before Mr. Trump outlines his plans on fiscal spending.
"The bond selloff cannot occur in a vacuum," said Jack Kelly, an investment director at Standard Life Investments. "It has implications for other asset classes, which then creates a supportive feedback loop for bonds," said Mr. Kelly.
Some investors have justified historically high U.S. stock market valuations against the backdrop of ultralow bond yields.
So far, equity markets have mainly gained as bonds sold off.
"The pace of the bond selloff should bring this question into focus, and keep a lid on the extent of the selloff, however aggressive," Mr. Kelly said.
Corrections & Amplifications:
Treasury yields, which rise as prices fall, are hovering around their highest level since early January after recording their largest one-week gain in more than three years following Mr. Trump's victory. An earlier version of this article incorrectly stated that the gain was the largest in more than three months. (Nov. 14)
Write to Christopher Whittall at christopher.whittall@wsj.com
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