US 10-year yield hits 4.95% on inflation fears
US Treasury yields surged to multi-year highs as oil prices climbed above $100 and inflation data exceeded expectations. Markets now price in a higher probability of a Federal Reserve rate hike next week.
The yield on 10-year US Treasury notes rose 10.93 basis points to 4.946%. This marks the highest level since October 2023. The 30-year bond yield climbed 7.27 basis points to 5.3587%. This is the highest reading since June 2007. The 2-year note yield increased 13.33 basis points to 4.56%. This is the highest level since July 2024. These moves reflect a sharp tightening in long-term interest rates.
Traders now assign a 70% probability to a 25 basis point rate hike at the upcoming Federal Reserve meeting. This is up from 62% earlier in the week. The shift follows the release of August producer price index data. The annual PPI rate increased 5.4%, exceeding the consensus estimate of 5.3%. Energy prices rose 4.2% in August after two months of declines. These figures indicate persistent inflationary pressure in the economy.
Oil prices drive inflation concerns
Oil futures rallied approximately 6% on Thursday. Both major benchmarks traded above $100 per barrel. This spike follows increased attacks on shipping routes in the region. Traders worry about further disruptions to already tight energy supplies. President Donald Trump stated he expects the conflict to end after the November midterm elections. Despite this comment, market participants remain focused on supply risks.
Molly Brooks, US rates strategist at TD Securities, noted that components feeding into core personal consumption expenditures were stronger than expected. She highlighted rising airfares as a key driver. Chris Osmond, chief investment officer at Fifth Third Wealth Advisors, said the market viewed the data as inflationary. He noted that the combination of high oil prices and hot service sector prices led to higher yields. Equities fell as rate hike odds firmed.
Treasury auction shows strong demand
The US government sold $22 billion in 30-year bonds on Thursday. The debt sold at a high yield of 5.308%. This was more than 2 basis points below the pre-auction trading level. The bid-to-cover ratio reached 2.61 times. This is the highest ratio since February. Lou Brien, a market strategist at DRW Trading, described the auction result as exceptional. He observed strong demand from overseas buyers despite the rising yields.
Earlier in the week, the government bought back $5.2 billion in bonds. This was less than the $6 billion cap set for the operation. It was only half of the $10.5 billion in bonds offered. The yield spread between 2-year and 10-year notes stood at 38.4 basis points. This was the flattest point since July 29. The August consumer price index report is scheduled for release on Friday. This data point will be the next major test for inflation expectations.
Market outlook remains cautious
GN auto markets/bonds data confirms the upward trend in treasury yields. The current environment reflects a trade-off between strong demand for long-term debt and fears of higher interest rates. Investors are closely monitoring the Federal Reserve's next move. The September 15 to 16 meeting is the immediate focus. The outcome will depend on the incoming consumer price index data. Until then, volatility in bond and oil markets is likely to persist.
