Global bond markets experienced a significant sell-off, with US Treasury yields reaching multi-decade highs. This rout was primarily triggered by surprisingly strong US business activity data for September, showing the fastest expansion in over five years and a surge in new orders. This data fueled expectations among traders that the Federal Reserve would implement further interest rate hikes to combat inflation, pushing the yield on five-year US Treasuries above 5% for the first time since 2007 and 10-year US Treasury yields above 5%.
Compounding the bond market turmoil were rising oil prices, with crude returning to triple-digit territory, and hitting $105 per barrel. The ongoing 7-month war involving Iran contributed to this increase, pushing commercial diesel fuel prices to record highs at $4.51 and regular unleaded gas to $4.48 per gallon. These elevated energy costs contributed to firms' input costs jumping at the steepest rate in four years, reinforcing inflationary pressures and the likelihood of more aggressive monetary policy.
The sell-off extended globally, with Japan's 10-year bond yield rising to its highest level since 1996 and Germany's 10-year bund notching its highest yield since 2009. New York Fed President John Williams indicated that another rate hike might be appropriate by year-end. While US stocks initially fell, analysts noted that strong corporate earnings projections, with S&P 500 companies expected to see a 35% jump in profits in 2026, could mitigate the impact of higher rates, and the AI bull market may not necessarily be over.
