Long-dated US borrowing costs reached their highest levels in over 20 years, with the 30-year US Treasury bond yield climbing to 5.48% on Thursday and 5.444% on Friday, marking its highest point since 2004. This surge is attributed to intensified selling pressure following hawkish comments from Federal Reserve Governor Michael Barr, who indicated that further policy adjustments might be necessary to control inflation. Stronger-than-expected economic data, including the purchasing managers' index hitting a four-year high, also contributed to the rising yields. Traders are now pricing in a nearly 71% chance of a rate hike in October, up from 53% before recent data.
The global bond sell-off has accelerated due to worries that high energy costs, resilient economic growth, and increased government spending will keep inflation elevated. The 10-year Treasury note yield rose to 5.17%, its highest since June 2007. The 2-year note yield remained largely unchanged at 4.899%. The increase in oil prices, with Brent crude futures approaching $110 a barrel, has been a significant factor, reigniting concerns about inflation and further Fed rate hikes. A Bloomberg Markets Pulse survey indicated that 53% of respondents expect the 30-year yield to breach 6% by year-end, a level not seen since June 2000.
Analysts highlight multiple drivers for the higher yields, including rising Fed hike expectations, higher growth expectations, and increased oil prices. Gennadiy Goldberg, head of US rates strategy at TD Securities, noted the exacerbation of the sharp rise in rates due to investor positioning amid a rapid resurgence of oil prices. The recent breach of 5% on the 10-year Treasury yield has investors now eyeing 6% as a potential pain threshold that could impact financial markets and corporate America. US 30-year mortgage rates are currently around 7%, their highest in two years, suggesting that borrowing costs are beginning to squeeze consumers.
The Treasury Department saw mediocre demand for recent auctions, including a $44 billion auction of 7-year Treasury notes and a $70 billion sale of 5-year debt, signaling weaker investor interest. Despite efforts by US Treasury Secretary Scott Bessent to contain rising borrowing costs, such as expanding buybacks of 20- and 30-year debt, yields have continued to climb. The Dow Jones Industrial Average fell 0.31%, while the S&P 500 and Nasdaq Composite were relatively flat, though the Nasdaq had reached a record high earlier in the week. Concerns persist that higher bond yields could derail the equity rally by making borrowing more expensive and redirecting investors from stocks to bonds.
