U.S. and European government bond markets sold off heavily Thursday in the wake of record-setting oil price rises as investors count the cost of faster inflation and higher interest rates.
U.S. 10-year Treasury yields, which move in the opposite direction of prices, rose 8 basis points to 2.46%, adding to the 60 basis point increase seen since the November 8 election - the biggest move in seven years - and taking the benchmark borrowing cost to the highest level since July 2015.
Long-dated Treasury bonds, which are the most sensitive to inflation as it erodes the present value of future fixed payments, fell sharply Thursday as well, taking yields to 3.12%
In Europe, benchmark 10-year German bunds rose 9 basis points in European trading to change hands at 0.33%, the highest since February, leading yield rises around the region and mirroring the sell-off seen in U.S. Treasury markets.
Bond investors are being forced to re-calibrate their assumptions for growth and inflation both in the wake of Wednesday's 9% increase in crude oil prices, driven by the first OPEC production cut since 2008, and the anticipation of more significant fiscal stimulus - and faster borrowing - from President elect Donald Trump.
Oil prices have risen more than 13% in the past two session as traders re-set supply expectations after OPEC members agreed to trim ouput by 1.2 million barrels per day from January. A record 700,000 contracts for Brent crude deliveries in March, the global benchmark, changed hands Wednesday, representing a value of more than $39 billion.
Alongside inflation concerns, European bonds are also are mired in volatility as rates rise in concert with U.S. Treasury yields while investors place bets that the European Central Bank will extend its €1.5 trillion quantitative easing program - designed to hold down borrowing costs with €80 billion in monthly asset purchases - past its March 2017 deadline.
The twin dynamics have led to one of the worst months of loses on record for global fixed income investors, with Bloomberg News estimating the damage at as much as $1.7 trillion.