The US bond market experienced a severe sell-off, with yields surging to levels not seen in almost two decades, primarily driven by stronger-than-expected economic data and weak demand at a five-year Treasury auction. The S&P Global Composite PMI for September, reported at 58.4, significantly surpassed forecasts and indicated the fastest business activity expansion in over five years. Manufacturing PMI hit 57, a high since spring 2022, and Services PMI reached 58.7, a 59-month high. These figures, along with strong employment and new order sub-indexes, suggest a booming economy with annualized growth potentially around 5%.
The robust economic data fueled concerns about persistent inflation and prompted traders to ramp up expectations for further Federal Reserve tightening. This comes after the Fed's first rate increase since 2023, lifting borrowing costs to a range of 3.75% to 4%. Michael Barr, a Fed official, also commented that additional rate hikes would likely be necessary due to increased risks to achieving inflation targets.
The bond market reaction was dramatic, with a nearly parallel 15 basis point sell-off in the belly of the yield curve. The 10-year US Treasury yield surged by almost 17 basis points to 5.13%, reaching its highest level since 2007. The 5-year yield surpassed 5% for the first time since 2007, and the 30-year yield traded around 5.4%, near its highest since 2004. A weak $70 billion five-year Treasury auction, which cleared at 5.033%—more than three basis points above expected levels—further accelerated the sell-off. Sean Simko, head of fixed-income investment management at SEI Investments, described the situation as a "trifecta" of strong economic data, supply pushing the five-year yield, and sticky global inflation.
This bond market rout also spilled over into the stock market, with the S&P 500 Index dropping almost one percent at one point. The Treasury Department's expanded buyback program, aimed at pushing down long-term yields, also faced challenges, with a planned $6 billion buyback of 20- to 30-year bonds failing to stem the rise in yields. Analysts like Vail Hartman from BMO suggested the scorching-hot PMI data imply ample latitude for both policy rates and Treasury yields to push higher in the near-term.
