The 10-year Treasury yield surged to 5.135% on Wednesday, reaching its highest level since July 2007, as a combination of stronger-than-expected economic data, rising oil prices, and weak demand at a five-year note auction triggered a broad selloff in government bonds.
The yield broke through the psychologically important 5% threshold and posted its largest one-day jump since April 2025. The move reflects growing expectations that the Federal Reserve will keep interest rates higher for longer, as the economy continues to show resilience despite tightening financial conditions.
Strong data fuels rate hike bets
Data from S&P Global showed U.S. business activity expanded at a robust pace in September. The services purchasing managers' index climbed to 58.7 from 56.5 in August, marking the highest reading in nearly five years. The manufacturing PMI also rose to 56.7, its strongest level in more than four years.
Chris Williamson, chief business economist at S&P Global Market Intelligence, noted that the U.S. is experiencing a significant growth surge across both manufacturing and services. He also highlighted that input costs increased at their fastest pace in four years, driven by higher fuel and transport expenses.
The upbeat data reinforced the view that the Fed may need to tighten policy further. According to the CME Group's FedWatch tool, traders now see a 70% probability of a quarter-point rate hike in October, up from 55% a day earlier.
Fed comments and weak auction add pressure
Federal Reserve Governor Michael Barr added to the bearish sentiment, stating that "further policy adjustments are likely to be needed" to ensure inflation returns to target in a timely manner. His remarks underscored the central bank's commitment to fighting inflation, even as growth remains solid.
The selloff intensified after the Treasury Department's $70 billion five-year note auction drew weaker-than-expected demand. The notes were sold at a yield of 5.033%, above the pre-auction expectation of 5.002%. Indirect bidders, a key measure of foreign and institutional demand, accounted for only 54% of the sale, well below the six-auction average of 65%.
Oil prices add to inflation concerns
Rising oil prices provided another headwind for bonds. Brent crude jumped more than 4% to above $103 per barrel, while U.S. crude gained over 2% to $92.55. The increase, driven by ongoing geopolitical tensions, has heightened concerns that energy costs could keep inflation elevated, making it harder for the Fed to achieve its 2% target.
The move comes ahead of the Treasury Department's expanded buyback program, with a $6 billion operation targeting debt maturing in 20 to 30 years scheduled for Thursday. Investors will be watching closely for any signs of stress in the Treasury market as yields continue to climb.
This article is for informational purposes only and does not constitute financial advice.
