U.S. Treasury yields soared to fresh two-decade highs on Thursday, with the 30-year bond reaching 5.446% (its highest in 22 years) and the 10-year bond climbing to 5.15% (its highest since 2007). This surge followed President Trump's rejection of Iran's conditional ceasefire proposal, which contributed to oil prices returning to $105 per barrel. The ongoing conflict has severely restricted energy shipments, causing commercial diesel fuel prices to hit all-time records at $4.51 per gallon (up 73% since the war began) and regular unleaded gas to rise 50% to $4.48 per gallon.
Rising oil prices are fueling inflationary concerns, leading investors to anticipate more aggressive Federal Reserve rate hikes. Pricing for a Fed hike in October has reached 70%, with a 57% expectation for back-to-back hikes in October and December. This sentiment was reinforced by a report from S&P Global, which indicated that U.S. business activity accelerated in September, but firms' input costs, especially fuel and transport, jumped at the steepest rate in four years. Wealth managers noted that the increase in Treasury yields is driven by real yields rather than inflation expectations, with weak demand at recent Treasury auctions (e.g., the seven-year auction had its weakest bid-to-cover ratio in a year) suggesting investor reluctance to absorb supply amid expectations of tighter Fed policy.
The global bond market is experiencing a significant sell-off, impacting sovereign debt worldwide. Japan's 10-year bond yield reached its highest level since 1996, and Germany's 10-year bund saw its highest yield since 2009. Despite these market pressures, Treasury Secretary Scott Bessent has attempted to intervene by buying back longer-dated Treasuries to keep yields low. However, these efforts have been met with skepticism, as UBS Global Wealth Management chief economist Paul Donovan remarked, "US Treasury Secretary ‘House’ Bessent seems to be demonstrating the house does not always win." The Treasury Department is scheduled to buy back up to $6 billion worth of 20- to 30-year bonds later on Thursday, a key test for Bessent's strategy.
Stocks also experienced declines in early trading, putting them on track for a third consecutive day of losses. The S&P 500 was down by 0.5%, the Nasdaq Composite declined 0.7%, and the Dow tumbled almost 300 points. Analysts from Bank of America highlighted that while macro data in the U.S. remain solid (4% unemployment, 2% growth), risks are accumulating for anxious markets, including ongoing trade wars, the energy supply shock, upcoming midterm elections, and potential threats to the AI boom. Edmond de Rothschild Asset Management pointed out that persistently high interest rates are increasing pressure on growth stocks and other risky assets.
