Treasury Yields Return to 2007 Levels as Traders Price a Fed Hike in October

The global government bond sell-off deepened on Wednesday, and the yield on the 10-year United States Treasury note returned to the highest level since 2007. The Financial Times reported that rising yields are straining public finances while market-implied odds of a Federal Reserve rate increase at the October meeting climbed to about 70 percent. The CME FedWatch measure, which reads probabilities off 30-day federal funds futures, put the chance at 73 percent.

Three things moved the market in the same direction on the same day. S&P Global's flash composite index of United States business activity rose to 58.4 in September from 56.0 in August, the fastest expansion since July 2021, with input prices rising at the quickest rate in four years. Federal Reserve Governor Michael Barr said in prepared remarks that further policy tightening is likely to be needed to return inflation to target in reasonable time, even after the quarter-point increase the central bank delivered last week. And a five-year note auction drew weak demand, which CoinDesk reported alongside a rebound in oil as the immediate trigger for the move in yields.

Israeli financial daily Globes wrote that the 10-year yield has already passed 5 percent, a level that investors once treated as a warning threshold, and that the debate among bond managers has shifted to whether 6 percent is plausible and what that would do to equity valuations. In its morning markets note, Globes described a mixed Asian session, with Japanese shares advancing, Chinese and Hong Kong shares falling, and the dollar at a two-month high.

The pattern fits a credit cycle reaching its expensive stage rather than a simple growth surprise. Cheap money over the past decade financed a stock of debt, corporate and sovereign, that now has to be refinanced at prices set by savers rather than by a central bank buying duration. Energy costs above 100 dollars a barrel are feeding straight into the input-price component of the surveys, so the Federal Reserve faces accelerating activity and accelerating costs at once. Hard assets moved with the dollar rather than against it: gold fell about 1.2 percent to 4,304 dollars an ounce and silver fell harder, as the dollar index reached its strongest reading since 30 July.