Two-year US Treasury yields hit a fresh five-year peak of almost 4.83 per cent while 10-year yields reached 4.82 per cent, their highest since before the Fed began increasing short-term borrowing rates in June 2004.

The US central bank’s hint of further rises beyond the current 4.75 per cent wrongfooted some traders and sent bonds tumbling on Tuesday.

Bond prices continued to fall on Wednesday, weighed down by a lacklustre auction of $14bn in five-year notes.

Fed funds futures also extended Tuesday’s declines as expectations of further rate rises hardened.

A move to 5 per cent at the May Fed meeting is now priced in, as is a 25 per cent chance of a rise to 5.25 per cent at the June meeting.

By late afternoon in New York bonds had moved off their lows, leaving two-year yields 0.9 basis points higher at 4.816 per cent and 10-year yields up 1.8bp at 4.812 per cent.

Eurozone government bond yields also steadied late in the day, but not before the yield on the two-year Schatz hit 3.289 per cent, the highest since October 2002. In late trading the two-year yield was up 0.6bp to 3.278 per cent and the 10-year Bund yield added 1.4bp to 3.758 per cent.

Hawkish comments from European Central Bank policymakers added to the bearish sentiment, reawakened by Tuesday’s robust German business sentiment survey.

Gilt prices found support from weaker UK mortgage lending and retail sales data, but prices still fell. The two-year gilt yield rose 1.5bp to 4.465 per cent and the 10-year gilt yield was 0.6bp higher at 4.376 per cent.

Yields on Japanese government bonds surged. The 10-year bond jumped 7.5bp to 1.775 per cent, the highest since August 2004, while the yield on the five-year rose 9bp to 1.295 per cent.