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Stock markets suffered one of their steepest sell-offs of the year Tuesday as bond yields continued to spike and doubts grew over how well major economies will fare as extraordinary levels of monetary and fiscal support are unwound.

The yield on the benchmark 10-year U.S. Treasury note rose for a sixth consecutive day to its highest level since June and Canadian bonds followed in its path. The velocity of the move in bond yields over the past week is already reverberating in the mortgage market in Canada, where several smaller lenders have raised fixed mortgage rates.

“Having been told for months that inflation is transitory, it is becoming increasingly apparent that the rise in energy prices, along with associated supply chain problems, is acting as a headwind to growth,” Michael Hewson, chief market analyst at CMC Markets UK, said in a note.

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Fresh data Tuesday showed that U.S. consumer confidence this month unexpectedly fell to its lowest since February, as soaring COVID-19 infections intensified concerns about the economy’s near-term prospects.

The reading was coupled with a rising trade deficit and an expected decline in vehicle sales.

“It seems like all these headwinds are hitting at the same time – potential higher taxes, higher inflation, uncertainty about the Delta variant, earnings and higher interest rates,” said Ken Mahoney, chief executive officer of Mahoney Asset Management.

The rise in the 10-year Treasury yield is particularly spooking investors, since it suggests the bond market will be more competitive with stocks for investment dollars. That’s “something investors really didn’t have to deal with for the last couple of years,” Mr. Mahoney added. Technology stocks, which are extra sensitive to rising interest rates given their high valuations based on future profits, were particularly hard hit Tuesday.

Bond yields have taken a sharp turn higher since the U.S. Federal Reserve signalled last week it was prepared to begin tapering its monthly bond purchases as early as November and could hike interest rates next year, faster than many market participants had been anticipating. The Bank of Canada has also dropped hints it could hike its trend-setting interest rate in 2022.

The yield on the 10-year U.S. Treasury note jumped to 1.54 per cent on Tuesday, up from 1.48 per cent late Monday and 1.32 per cent a week ago.

Canada’s five-year bond yield, influential in the pricing of fixed-term mortgages, continued to track higher as well, climbing to near 1.1 per cent – its highest level since prior to the North American pandemic-induced lockdowns in early 2020.

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Robert McLister, an interest rate analyst and mortgage planner, said that while none of Canada’s Big Five banks have announced changes yet, he’s heard from a half dozen non-bank lenders that have either lifted, or will be lifting, fixed rates this week.

So far, they’ve boosted their fixed-term mortgage rates by as much as 35 basis points. Anything more than 10 to 15 basis points is an aggressive move by historical standards, according to Mr. McLister. (There are 100 basis points in a percentage point.)

“Most of the time we see only 5 or 10 basis point increases. A 20 to 35 basis point move means lenders are playing catch-up to significant, usually rapid, increases in funding costs. And that’s exactly what we’re seeing now. The bond market is quickly recalibrating to a sudden pull-forward in rate hike expectations,” he said.

This week’s swoon for the market is reminiscent of an episode early this year when expectations for rising inflation and a stronger economy sent Treasury yields climbing sharply. The 10-year yield jumped to nearly 1.75 per cent in March after starting the year around 0.90 per cent. Tech stocks also took the brunt of that downturn.

Fixed mortgage rates also started creeping up at the start of this year. But a subsequent fall in bond yields halted that move.

Robert Kavcic, senior economist with Bank of Montreal, thinks higher mortgage rates may stick around longer this time, as the economic expansion broadens and inflation persists. “We see about 40 basis points of upside in five-year government of Canada yields by end-2022 and another 30 basis points by end-2023. That’s not a game changer but enough to pressure fixed rates gradually higher and out of the sub-2 per cent range,” Mr. Kavcic said in a note.

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The S&P/TSX Composite Index closed down 289.28 points, or 1.4 per cent, at 20,174.14, with tech stocks falling 3.7 per cent in a broad descent across sectors. So far in September – historically a weak month for stocks – the Canadian index is down 2 per cent.

The S&P 500 index and the Nasdaq Composite Index were on track for their largest monthly declines since September, 2020. The S&P 500 fell 2 per cent, its biggest one-day percentage drop since May 12, and the Nasdaq lost 2.8 per cent – its worst day since March 18.

Weakness pervaded across most asset classes, including gold, suggesting widespread risk-off sentiment.

Progress on U.S. government funding negotiations was also being closely watched by investors, with Democrats scrambling to prevent a government shutdown and a potentially economically crippling U.S. credit default while also trying to agree on a mammoth tax and spending package.

With files from Reuters and The Associated Press

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