By yourNEWS Media Newsroom.
U.S. government bond yields surged Wednesday, pushing the benchmark 10-year Treasury above 5% and to its highest level since July 2007 as investors reacted to stronger-than-expected economic activity and indications that the Federal Reserve may need to tighten monetary policy further.
The 10-year Treasury yield climbed to about 5.079%, roughly 0.12 percentage points above the previous day’s level, during Wednesday’s selloff. Other market reports showed the yield trading around 5.05% later in the session after reaching its highest point in more than 19 years.
Treasury yields move inversely to bond prices, meaning yields rise as investors sell government debt. The latest move reflects growing expectations that borrowing costs could remain higher for longer as the economy continues to expand despite the Federal Reserve’s efforts to restrain inflation.
Those expectations strengthened Wednesday after Federal Reserve Gov. Michael Barr said additional adjustments to monetary policy would likely be necessary to bring inflation back toward the central bank’s 2% goal.
Barr said economic growth remains strong and the labor market solid, but inflation is still running above the Fed’s target and is not clearly moving back toward 2% quickly enough. He supported the Federal Open Market Committee’s rate increase last week and said further action would probably be needed.
“In my base case, further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion,” Barr said in remarks Wednesday.
The Fed raised its benchmark interest rate last week for the first time in more than three years and signaled that additional tightening could follow.
Fresh economic data Wednesday gave bond investors another reason to anticipate higher rates.
S&P Global’s flash U.S. Composite Purchasing Managers’ Index, which measures activity across the manufacturing and services sectors, jumped to 58.4 in September from 56.0 in August. Any reading above 50 signals expansion.
The September reading was the highest since July 2021 and represented the fourth consecutive month of accelerating business growth. Services activity increased to 58.7, while manufacturing strengthened sharply as well.
The stronger data suggested that the U.S. economy continues to withstand elevated borrowing costs, potentially giving the Fed additional room to keep monetary policy restrictive as it attempts to control inflation.
Investors responded by increasing bets on another rate increase. Fed funds futures on Wednesday placed the probability of an October rate hike at about 73%, up from approximately 53% earlier in the day, according to Reuters.
Pressure was also visible at the shorter end of the Treasury market.
The yield on the two-year Treasury, which is particularly sensitive to expectations about Federal Reserve policy, rose about 0.099 percentage points to 4.876%.
The rise in yields has consequences well beyond the government bond market. The 10-year Treasury is an important benchmark for borrowing costs throughout the economy, influencing mortgage rates, corporate debt and other forms of credit.
Higher Treasury yields can also pressure stocks because rising risk-free returns make government bonds more competitive with equities while simultaneously increasing financing costs for businesses and consumers.
Stocks fell Wednesday as bond yields climbed, while oil prices moved higher.
The latest Treasury selloff extends a broader rise in long-term borrowing costs that has pushed the 10-year yield beyond levels reached earlier this month. On Sept. 15, it touched 5.041%, already its highest reading since July 2007, as markets prepared for the Fed’s subsequent rate increase.
Wednesday’s move pushed the benchmark still higher.
With business activity accelerating, inflation remaining above the Fed’s target and policymakers signaling that further tightening may be required, investors increasingly face the prospect that elevated interest rates could persist longer than previously anticipated.
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