US Treasury yields experienced a significant surge, reaching levels not seen in almost two decades. The 10-year Treasury yield climbed to as high as 5.08%, its highest since June 2007, while the 30-year Treasury yield hit 5.38%, a level also last observed before the global financial crisis. This spike was attributed to several factors, including rising oil prices, which saw European Brent oil exceed $101 per barrel and US crude oil jump to nearly $92, and robust economic data indicating accelerated business activity growth.
Fresh economic data points further propelled yields higher. S&P Global reported that US business activity growth accelerated for the fourth consecutive month in September, reaching its fastest rate in over five years. The flash US Composite PMI Output Index increased to 58.4, the highest since July 2021. This strong economic performance, coupled with rising input costs due to fuel and transport expenses, has led analysts to anticipate further inflationary pressures and potential additional interest rate hikes from the Federal Reserve.
Federal Reserve Governor Michael Barr indicated on Wednesday that further interest rate hikes would likely be necessary to combat stubbornly high inflation, which remains above the central bank’s 2% annual target. Traders are now pricing in a 73% probability of an October rate hike. The prospect of higher rates and borrowing costs negatively impacted stock markets, with the Nasdaq Composite index tumbling 1%, the S&P 500 falling 0.6%, and the Dow declining 270 points. Inflation-sensitive sectors like travel, large technology firms, utilities, consumer discretionary, and real estate were among the biggest decliners.
The surge in yields translates to more expensive borrowing costs for both households and companies. The average 30-year fixed rate mortgage now stands at 7.17%. The increased supply of bonds, partly driven by corporate borrowing for AI infrastructure buildout, is also contributing to the higher yields as investors demand more compensation for holding government debt. Analysts like EY-Parthenon chief economist Gregory Daco believe the Fed is on track for an additional 25-basis-point rate hike in December, which could increase the risk of a stock market correction.
