On Wednesday, the 10-year U.S. Treasury yield climbed to as high as 5.07%, marking its strongest level since 2007, while the 30-year yield touched 5.37%.
The surge was driven by rising oil prices and significantly stronger-than-expected economic activity data, which intensified concerns that the Federal Reserve may continue raising interest rates, pushing bond yields upward.
Federal Reserve Governor Michael Barr also stated publicly that further rate increases may be necessary to combat stubborn inflation. According to the CME FedWatch tool, market odds for another Fed rate hike in October have climbed to 70%.
Brent crude oil for November delivery moved higher, and former President Trump floated the idea of a U.S. diesel export ban, heightening worries over fuel supply constraints and rising energy prices. Meanwhile, S&P Global's September manufacturing PMI rose to 57, far exceeding the economist forecast of 53.6, signaling ongoing expansion in manufacturing activity.
Gregory Daco, chief economist at EY-Parthenon, said Wednesday: "We expect the Fed to raise rates by another 25 basis points in December." He added that such a move "could increase the risk of a stock market correction."
Other key points: Long-dated Treasury yields have been steadily climbing this year, as investors demand higher compensation for the various risks associated with holding U.S. government debt.
Companies are taking on heavy debt and issuing bonds to fund AI projects, increasing bond supply and further competing with Treasuries for market capital. Bond prices and yields move in opposite directions.
Higher Treasury yields mean borrowing costs become more expensive for both households and businesses. With inflation still running well above the central bank's 2% target, the Fed already raised its benchmark interest rate by 25 basis points earlier this month.
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