The US Treasuries market experienced a significant selloff on Wednesday, pushing yields across most maturities to their highest levels in nearly two decades. This was primarily attributed to stronger-than-forecast US manufacturing and services activity, an unexpected surge in oil prices, and surprisingly dim demand at a five-year Treasury auction. The five-year note yield surpassed 5% for the first time since 2007, while thirty-year yields neared their 2004 highs. This market turbulence also impacted stocks, with the S&P 500 Index dropping almost 1% at one point.
Analysts attributed the market's reaction to a "trifecta" of factors: strong economic data, supply pressure from the weak five-year auction, and persistent global inflation concerns. Sean Simko, head of fixed-income investment management at SEI Investments, noted that traders were boosting bets on further Federal Reserve policy tightening. The economic data and geopolitical tensions in the Middle East, which led to higher oil prices, fueled these expectations.
Futures markets now fully price in three quarter-point rate hikes over the next year, with significant hedging for a fourth, potentially bringing the central bank's target rate to a range of 4.75% to 5%. Christophe Boucher, CIO of ABN AMRO Investment Solutions, stated that Wednesday's economic data would likely solidify the Fed's hawkish stance. The benchmark 10-year rate rose almost 17 basis points to 5.13%, its highest since 2007, and the 30-year yield reached approximately 5.4%, also a high since 2007.
The weak five-year Treasury auction, with a 5.033% yield, was more than three basis points above expected levels and marked the second-worst five-year auction since 2018. This surge in yields caused a broad decline in the stock market, with the rate-sensitive Russell 2000 falling 1.8%, the Nasdaq 1.1%, the S&P 500 0.75%, and the Dow Jones Industrial Average 0.68%. Only the energy sector saw gains, rising 1% due to increased oil prices. October hike odds jumped to 69% from 55% the previous day, with nearly four hikes priced in over the next year.
