Global bonds continued their selloff, with Treasury yields reaching levels not seen in almost two decades, driven by strong economic data and weak demand at a debt auction. The yield on the US 10-year Treasury surged 15 basis points to 5.11%, the biggest one-day increase since April 2025, and the five-year note yield surpassed 5% for the first time since 2007. This intensified expectations for more Federal Reserve interest-rate hikes, with swaps now fully reflecting three quarter-point hikes over the next year and significant hedging for a fourth, potentially bringing the target rate to a range of 4.75% to 5%. This "re-tightening cycle" implies higher discount rates for equities, increased mortgage and corporate borrowing costs, and a higher bar for risk assets, according to Tony Miano at Wells Fargo Investment Institute.
The bond market drama was further exacerbated by hawkish comments from Federal Reserve Governor Michael Barr, persistently high energy prices due to the Iran war, and a hot purchasing managers' report. Brent crude oil, after an earlier rally, settled around $102.30 a barrel. The 10-year Treasury yield climbed to 5.225% late Thursday, its highest since 2007, and the 30-year yield reached 5.502%. This ascent in yields had a ripple effect globally, with Japan's 10-year yield advancing seven basis points to 3.055% and Australia's 10-year yield rising 15 basis points to 5.40%. The 30-year fixed-rate mortgage, which tracks the 10-year note, rose to 7.45%, the highest level since 2024.
Equities felt the pressure from rising yields, with the S&P 500 and Nasdaq experiencing flat finishes on Thursday, while the Dow slipped 0.3%. Futures for the Dow, S&P 500, and Nasdaq-100 were all slightly down. Despite an earlier artificial-intelligence-fueled rally that pushed the Nasdaq 100 to a record high, investor concern grew that elevated bond yields are eroding the relative appeal of equities and pressuring valuations. The Dow is heading for its fourth consecutive losing week, down 0.6% in the period. Simon Wiersma at ING Bank noted that while higher yields might not trigger a broad equity bear market, they are likely to cap valuation expansion and make earnings growth increasingly important. Joachim Klement at Panmure Liberum added that rising yields will eventually take a toll on stock markets by pushing up the cost of capital and the discount rate for future cash flows.
