The yield on the benchmark 10-year Treasury note climbed more than 14 basis points to 5.116%, marking its highest level since July 2007. The spike occurred on Wednesday as fresh data from the services and manufacturing sectors intensified concerns that the Federal Reserve may need to raise interest rates further to combat persistent inflation.
The 2-year Treasury yield also jumped, rising over 12 basis points to 4.899%, a peak not seen since May 2024. Meanwhile, the 30-year Treasury yield increased by more than 9 basis points to 5.40%.
Market sentiment shifted sharply after S&P Global reported that its services Purchasing Managers’ Index (PMI) reached 58.7 in September, the highest reading in nearly five years, up from 56.5 in August. The manufacturing PMI similarly accelerated to 56.7, exceeding four-year highs.
Chris Williamson, chief business economist at S&P Global Market Intelligence, described the economic environment as a boom. He noted that barring the post-lockdown demand surge seen in 2020, the current expansion represents the strongest improvement in business activity recorded since early 2015. However, Williamson cautioned that input costs are rising at the steepest pace in four years, driven largely by spikes in fuel and transportation expenses linked to higher oil prices.
Addition to the sell-off in bond prices were comments from Federal Reserve Governor Michael Barr, who indicated that additional rate hikes are likely necessary. Barr stated that risks to achieving the central bank’s inflation target have increased.
The market is already pricing in aggressive monetary policy moves. Following the Fed’s 25-basis-point rate hike last week, which was the first increase in three years, odds of another quarter-point rise in October jumped to 73%, up from 55% the previous day, according to the CME Group’s FedWatch tool. The recent hike was a response to rising energy costs keeping inflation readings elevated.
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