Key bond yields spike to their highest levels in 3 months as the strongest Chinese manufacturing report in a decade stokes new inflation fears

The 10-year Treasury yield exceeded 4% as China's revved-up manufacturing activity was viewed by markets on Wednesday as inflationary.

• Bond yields soared Wednesday, extending this year's jump in borrowing costs. 
• The closely watched 10-year Treasury yield pushed above 4% for the first time since November. 
• "Bond love" is at a 10-year high in recommended allocations, says Bank of America. 

This year's surge in US bond yields stretched into the beginning of March as strong Chinese economic data on Wednesday fed into global fears about persistently high inflation.  

The 10-year Treasury yield, a gauge of borrowing costs for a range of consumer loans and other debt, sprang up nine basis points to 4.006%. That was highest yield on that government note since November. US stocked slipped as yields jumped on Wednesday. 

"In China, stronger-than-expected Manufacturing PMI data led to a 4% rally in Hong Kong's Hang Seng, but stronger growth in China will be greeted as inflationary by the market, hence the move higher in US Treasury yields," Bespoke Investment Group wrote in a Wednesday note.  

US bond prices fell, sending yields higher, after China's National Bureau of Statistics said its manufacturing activity index rose to 52.46 in February. That reading was the highest since April 2012, according to Bloomberg, and it surpassed expectations of 50.5. 

The 2-year Treasury yield, which is sensitive to expectations about interest-rate policy at the Federal Reserve, charged up 10 basis points to 4.904%, pushing further into a 16-year high. 

Bond yields have shot up in 2023 after a run of higher-than-expected consumer and wholesale prices for January. While inflation levels are off their peaks, they remain above the Fed's targets, leading investors to price in expectations that policy makers will hike up interest rates beyond 5% this year. They've also whittled down expectations for rate cuts this year. 

As bond yields have risen, "bond love" is at a 10-year high, Bank of America said Wednesday. In other words, the recommended allocation to bonds is the highest in a decade. 

Wednesday's data from China "reflects the up-shift in the Chinese economy after COVID-19 restrictions were removed," UBS Global Wealth Management said in a note. "We expect China's reopening to spur domestic consumption, which should benefit China's neighbors in North and Southeast Asia as well as several commodity-sensitive emerging economies such as those in the Middle East, Africa, and Latin America."