By: Liz Capo McCormick

(Bloomberg)–Traders around the world were left reeling on Thursday as stock and bond markets aggressively repriced the likelihood of higher global interest rates. US Treasuries tumbled, pushing two-year yields to the highest since 2007, while the UK 10-year yield jumped to the highest since 2008. The S&P 500 Index slumped the most since May, before retracing some of that loss, while equities benchmarks in the UK and Europe slid more than 2% apiece.

Central banks globally continue to be confounded by inflation rates that remain elevated despite aggressive policy tightening during the past two years. Minutes from the Federal Reserve revealed this week just how divided policy makers were on pausing interest-rate increases last month. That triggered a positioning rethink which gathered steam Thursday as gauges of job creation and service-sector activity bolstered conviction that the Fed will resume hikes later this month.

“There’s probably a little bit more work for the Fed to do, and the market is pricing that in,” said Gregory Faranello, Head of US rates Trading and Strategy for AmeriVet Securities. “We can talk about recession all day long, but the short-term data has been stronger than expected in the areas that count,” especially employment.

The two-year yield rose as much as 17 basis points to 5.12%, pushing past levels reached in early March. The 10-year yield climbed to 4.08%, just short of this year’s peak. And the dramatic price action in US government bonds was exceeded in several other sovereign bond markets, notably in the UK. Traders there now see the highest interest rates since 1998.

“We seem to be caught up in a frenzy as global central banks — UK in particular — is repricing a more aggressive policy path,” said Subadra Rajappa, head of US interest rates strategist at Societe Generale. “The job market remains strong despite higher interest rates and inflation is slow to moderate.”

US companies added almost half a million jobs last month, more than twice as many as expected and the most in over a year, according to data released Thursday by ADP Research Institute. Friday, the US Labor Department is slated to release broader employment data for June. Also Thursday, the ISM Services Index rose more than expected, aided by a rebound in its labor component.

Federal Reserve Bank of Dallas President Lorie Logan said Thursday that more monetary policy tightening will likely be needed to spur meaningful disinflation and bring price-growth rates back to the central bank’s target. Fed’s Logan Says More Rate Hikes Needed to Slow Hot Inflation

After raising its policy rate to a band of 5%-5.25% in May, Fed policy makers opted to leave it unchanged in June, a decision they said was justified by the need to monitor the impact on the economy and banking system of their cumulative action since March 2022. At the same time, they released forecasts showing that in aggregate, they expected to raise rates twice more this year. Still, despite the wild moves in Treasuries and stocks, traders are not fully pricing in a second additional quarter-point hike. Those odds edged slightly higher Thursday. Swap contracts linked to future policy decisions almost fully priced in a quarter-point increase at the next meeting on July 25-26 and just over 50% odds of an additional hike by year-end.

–With assistance from Ye Xie