U.S. 10-Year Yield Hits 24-Year High... Long-Term Bonds Sold Off Despite PCE Slowdown

5.304% Intraday—Surpasses 2007 Peak

Short-Term Yields Drop on Core PCE Miss

Robust Growth, Corporate Bond Supply Pressure Long-Term Yields

The yield on the US 10-year Treasury note climbed as high as 5.304% intraday, marking its highest level in 24 years. Despite inflation data coming in below expectations, robust economic growth and the burden of increased corporate bond issuance were seen as key drivers pushing up long-term yields.

According to Tradeweb, as cited by The Wall Street Journal (WSJ) on September 30 (local time), the yield on the US 10-year Treasury reached 5.304% during the session. This surpassed the previous intraday peak of 5.303% set in 2007 and represented the highest level since May 2002.

The 10-year US Treasury yield serves as a global benchmark and is used as a reference for various borrowing rates, including those on mortgages. Because bond yields move inversely to prices, an increase in yields means a decrease in bond prices.

Upward revision of growth rate and increased bond supply... Concerns over prolonged high interest rates

The US 10-year Treasury yield surged past 5.30% intraday, reaching its highest level in 24 years. Investing.com

WSJ analyzed that a string of strong economic indicators has led to the assessment that current borrowing costs are not significantly restraining growth, which contributed to selling pressure in Treasuries. Large-scale corporate bond issuance and the rebound in oil prices have also acted as upward pressure on long-term yields.

On the same day, the US Department of Commerce revised the annualized growth rate of the second-quarter gross domestic product (GDP) to 2.2%, up 0.7 percentage points from the previous estimate of 1.5%. This is a sign of resilient economic growth despite elevated borrowing costs and the ongoing war in the Middle East. If the economy continues to perform well, expectations grow that the Federal Reserve (Fed) can maintain higher rates for longer, which in turn places additional upward pressure on Treasury yields.

US Treasury yields have been rising overall since the sharp increase in energy prices following the war involving Iran. While oil prices have recently eased somewhat, bond investors remain concerned that persistently high energy costs could spread to the prices of other goods and services.

At the ICE Futures Exchange, November delivery Brent crude closed at $103.53 per barrel, up about 1.2% from the previous session. On the New York Mercantile Exchange, November delivery West Texas Intermediate (WTI) crude also rose about 1%, finishing at $90.42 per barrel.

Short-term yields dip temporarily on slowing inflation... Long-term yields rise

However, the two-year US Treasury yield fell temporarily to 4.864% after the PCE release, dropping below the previous day's 4.887%. Typically, the two-year yield is highly sensitive to short-term interest rate expectations. After inflation data released that day came in below forecasts, the likelihood of a Federal Reserve rate hike at the October Federal Open Market Committee (FOMC) meeting was seen to have retreated somewhat.

According to the US Department of Commerce, the core Personal Consumption Expenditures (PCE) price index for August rose 3.0% year-on-year, below both the market consensus of 3.3% and the 3.2% suggested by Federal Reserve Chair Kevin Warsh at this month's post-meeting press conference.

WSJ reported that, while a technical adjustment to government statistics contributed to the slowdown in core inflation, investors generally interpreted this data positively, though only to a limited extent. The overall PCE inflation rate, which includes energy and food, stood at 3.4%, the same as the revised rate for July.

Expectations for a Fed rate hike in October recede

With evidence of slowing inflation, expectations for further Fed rate hikes have diminished. The implied probability of an October rate hike has fallen to about 39%. This was due both to the softer-than-expected inflation data and to Fed officials' comments the previous day suggesting there was no need to rush additional increases.

WSJ reported that some analysts believe the yield on long-term Treasuries could remain elevated even if oil prices fall further. They pointed to the continuing rise in global government debt and massive private sector investment in artificial intelligence (AI) infrastructure as factors that could sustain upward pressure on long-term yields.

This content was produced with the assistance of AI translation services.