Treasury Yields Hit Multi-Decade Highs Amid Rate Hike Expectations

Treasury yields were trading at multi-decade highs early Thursday morning, as investor bets on another rate hike from the Federal Reserve mounted.

The benchmark 10-year Treasury note yield, which is tied to rates on mortgages, surged to 5.139% — its highest level since July 2007. The yield on the 2-year note climbed to 4.897% for its highest since 2023, while the 30-year Treasury yield was up more than 3 basis points to reach a post-2004 peak of 5.438%.

One basis point equals 0.01%, and yields and prices move in opposite directions.

It comes amid a global government bond selloff, with Japan's 10-year JGB yield rising 8 basis points to 3.055%, the highest since August 1996. U.K. Gilts and German Bunds also moved higher, with yields on various European bonds hitting fresh multi-year highs.

Several factors drove the Treasury selloff, including stronger-than-expected U.S. economic activity, hawkish commentary from a Federal Reserve official, and high oil prices.

S&P Global's purchasing managers' index, released on Wednesday, showed that services PMI rose to 58.7 in September, the highest level in almost five years. Its manufacturing counterpart was up to 56.7, a level not seen in over four years.

The data drove expectations of more rate hikes, with traders last pricing in a more-than-75 % chance that the Federal Open Market Committee will increase rates again at its October meeting, per the CME Group's FedWatch tool. That compares to a roughly 49% probability just a week ago.

Michael Barr, a member of the Fed's Board of Governors, said in a speech on Wednesday that "further policy adjustments" are likely to come to bring inflation down to target.

Speaking in London on Thursday, New York Federal Reserve President John Williams said it would be "reasonable" to expect another Fed interest rate hike by the end of the year.

"The main driver was a strong batch of PMIs, along with a rebound in oil prices, which both led to mounting speculation about faster rate hikes," Deutsche Bank analysts said of the Treasurys selloff in a note Thursday.

"So [PMI results] played into the narrative of resilient growth, which in turn would enable the Fed to keep hiking rates to deal with inflation," they added.

Thursday's moves came as oil prices rose sharply. International Brent crude futures rose about 2.8% to trade at $105.95 a barrel, while West Texas Intermediate crude gained 2.2% to $94.40.

Investors will await the weekly jobless claims and new home sales for August on Thursday as they look for further insights on the state of the U.S. economy.