The 10-year Treasury yield climbed to 5.07 percent on Wednesday, marking its highest level since 2007. The 30-year Treasury yield simultaneously touched 5.37 percent as the stock market declined.
Market participants are reacting to a combination of rising oil prices and business activity data that exceeded expectations, both of which have intensified concerns about further Federal Reserve rate hikes. Federal Reserve Governor Michael Barr signaled on Wednesday that additional interest rate increases are necessary to reduce sticky inflation.
Investors adjusted their positioning, raising the probability of a Fed rate hike in October to 70 percent. This shift occurred as Brent crude contracts for November delivery rose to approximately $100 per barrel. President Trump backed a ban on US diesel exports on Tuesday, a move that added to concerns regarding tight fuel supplies and elevated energy prices.
Economic indicators also contributed to the upward pressure on yields. The S&P Global Manufacturing PMI expanded to 57 in September, significantly surpassing economists' expectations of 53.6. Gregory Daco, chief economist at EY-Parthenon, stated that the Fed is on track for an additional 25-basis-point rate hike in December. Daco added that this potential move could increase the risk of a stock market correction.
Long-dated bond yields have risen throughout the year as investors demand greater compensation for the risks associated with holding government debt. Corporate borrowing for artificial intelligence build-out has also increased, adding to the supply of bonds competing for investor demand. Because higher bond yields move inversely to bond prices, these increases make it costlier for households and companies to secure loans.
The Federal Reserve raised its benchmark interest rate by 25 basis points earlier this month. This action followed a period where inflation has remained firmly above the central bank's 2 percent target.