SYDNEY, July 7 (Reuters) - Australian yields surged to decade highs on Friday, joining a global bond rout after strong U.S. jobs data added to fears that interest rates are headed higher for longer, while the local dollar took a hit from worsening risk appetite.
Benchmark 10-year government bond yields jumped 16 basis points (bps) to 4.28%, the highest since January 2014. That brought the gains over the past two sessions to a staggering 28 bps.
Three-year yields also surged 16 bps to 4.287%, a fresh high since mid-2011. They have also advanced 28 bps over the last two sessions and are trading above the 10-year yields, suggesting an inverted yield curve which signals the risk of recession.
In tandem with higher interest rates in the U.S. and Europe, markets moved to fully price in two more rate hikes from the Reserve Bank of Australia to 4.6%, with the risk of another, by the end of the year.
In New Zealand, two-year swap rates climbed to 5.7070%, up 14 basis points and pricing in a 80% chance of another hike in the local cash rate to 5.75% even as the Reserve Bank has said rate hikes are over.
Surprisingly strong partial figures on the U.S. labour market, including June private payrolls and jobless claims data, sent a selloff in bond markets into overdrive.
Two-year Treasury yields burst above 5%, and selling wrapped around the globe with German and gilt yields hitting 15-year highs.
"There has been no single catalyst for the selloff over recent days, though moves were extended after strong US data and hot UK wage anecdotes from a BoE survey," said Tapas Strickland, head of market economics at NAB.
Also weighing on sentiment were comments by Federal Reserve Bank of Dallas President Lorie Logan that she remained concerned whether inflation would return to target in a timely way, Strickland said.
The risk-sensitive Aussie dollar touched $0.6599 overnight before finding support around 66 cents and stabilising at $0.6629.
The kiwi also recovered losses to $0.6160, having eased 0.3% to as far as $0.6133.
"U.S. data continues to surprise to the upside, and ahead of non-farm payrolls tonight, markets are clearly jumpy," said analysts at ANZ. (Reporting by Stella Qiu; Editing by Kim Coghill)
