Long-dated US Treasury yields surged and global stock markets slid further as investors worried the Federal Reserve may not be able to curb inflation in the years ahead despite US data showing decelerating wage growth in April.
Labor Department data on Friday showed the unemployment rate fell to its pre-pandemic low of 3.5 per cent last month as job growth moderated and average hourly earnings eased to 5.5 per cent from a year earlier.
But the data underscored the challenges the Fed and other central banks face as they battle rising inflation with China's lockdowns causing persistent supply chain disruptions and the war in Ukraine putting pressure on food prices.
The inflation outlook past the next two years is beginning to look cloudier for bonds, or at least for bond traders, said Jim Vogel, interest rate strategist at FTN Financial.
"We have taken into account, not necessarily the inability of the Fed to fight inflation, but an inflation problem that for right now is beyond central banks to calm for the rest of the decade. That's pretty bleak," Vogel said.
The yield on benchmark 10-year Treasury notes rose 5 basis points to 3.119 per cent, a rate last seen in November 2018 after sharply rising from about 1.5 per cent at the end of 2021.
The Fed hopes to slow inflation by tightening monetary policy. There is a risk that too much tightening could drag the economy into recession, so market volatility has increased.
Stocks on Wall Street fell in volatile trade that pushed the major indexes briefly into the green and on track for a fifth straight week of declines. The Nasdaq fell as much as 2.66 per cent.
Fed funds futures priced in a roughly 75 per cent chance of a 75 basis-point interest rate hike at next month's Fed policy meeting - even after Fed Chair Jerome Powell said on Wednesday the US central bank was not considering such a move.
The pan-European STOXX 600 index fell 1.91 per cent as regional shares chalked up their worst week in two months. MSCI's gauge of global equity performance shed 1.39 per cent and emerging market stocks lost 2.61 per cent.
On Wall Street, the Dow Jones Industrial Average fell 1.08 per cent, the S&P 500 slid 1.14 per cent and the Nasdaq Composite dropped 1.65 per cent.
The dollar slipped against a basket of currencies after two volatile days as investors focused on how aggressive the Fed will be in hiking rates.
The dollar index hit a 20-year high overnight on safe haven demand, the day after a sharp stock selloff driven by rising US interest rates and as European currencies weakened on worries about growth in the region.
The dollar index rose 0.077 per cent, with the euro up 0.07 per cent to $1.0547. The yen weakened 0.35 per cent at 130.56 per dollar.
The European Central Bank should raise its deposit rate back into positive territory this year, French central bank chief Francois Villeroy de Galhau said, indicating his support for at least three rate hikes in 2022.
The Bank of England raised rates by 25 basis points on Thursday as expected.
Oil prices climbed for a third straight session, shrugging off concerns about global economic growth as impending European Union sanctions on Russian oil raised the prospect of tighter supply.
US crude futures rose $1.51 to settle at $109.77 a barrel and Brent settled up $1.49 at $112.39.
Gold rose on a weaker dollar but the prospect of aggressive rate hikes from the Fed put bullion on course for a third consecutive weekly decline.
US gold futures settled 0.4 per cent higher at $1,882.80 an ounce.
Bitcoin fell 1.64 per cent to $35,933.47.
Germany's 10-year government bond yield rose to 1.082 per cent, its highest since 2014.