The 10-year U.S. Treasury note yield moved lower after reaching a multiyear high on Monday ahead of this week's Federal Reserve interest rate decision.
The benchmark rate — which influences mortgages, auto loans and credit card debt — was last down 2 basis points at 4.955%. It had earlier reached 5.014%, its highest level since October 2023.
The 2-year Treasury note yield, the most sensitive to short-term Federal Reserve interest rate policy, fell less than 2 basis points to 4.626% after it touched the highest since July 2024 last week.
The yield on the longer-dated 30-year Treasury bond, more sensitive to geopolitical risks, were down more than 2 basis points at 5.328%.
One basis point equals 0.01%, and yields and prices move in opposite directions.
The latest moves come after August consumer price index data reported on Friday matched expectations while remaining far above the Fed's goal of 2% inflation, as it has for the past five years.
Last week's CPI report was the final inflation indicator the Fed will see before it holds its policy meeting on Tuesday and Wednesday this week. Odds that the Federal Reserve will raise interest rates by a quarter percentage point at its policy meeting now stand at 90%, according to the CME Group FedWatch tool.
"Hiking would be the cleaner decision based on the data and current market expectations," said Jay Woods, chief market strategist at Freedom Capital Markets. "I believe the market has priced that in and may rally with a hike. No change may cause a negative market reaction as it screams once again the Fed is behind the curve."
All eyes on 10-year yields
The 10-year Treasury yield hit the psychologically important 5% threshold. If the yield moves beyond 5.02%, it would reach its highest level since July 2007, before the Global Financial Crisis of 2008-2009.
Yields that are climbing because of strong economic growth carry different implications for stocks and the broader economy than yields driven by resurgent inflation, mounting government deficits or stress within the Treasury market itself.
The latest rise in yields stems partly from a supply-demand imbalance as enormous debt from the Treasury and corporations competes for investor capital, said Jason Ware, chief investment officer at Albion Financial Group, who added he doesn't expect markets to break simply because the 10-year moves above 5%.
Higher yields aren't necessarily bearish if they're accompanied by healthy growth. Ware pointed to a resilient economy and steady core inflation, arguing that stocks would be more vulnerable to a slowdown in either consumer spending or artificial-intelligence investment than to the 10-year crossing an arbitrary threshold.
But the 5% level may start to be a problem for stocks if investors demand more compensation for inflation and fiscal risks. Large federal deficits, heavy debt issuation and sticky inflation have all contributed to a rising term premium, the extra yield or compensation that investors demand for holding a long-term bond instead instead of rolling over short-term Treasury bills.
Surging crude oil prices have added another potential source of price pressure.
Bessent intervention fizzles
Treasury Secretary Scott Bessent has sought to contain pressure at the long end of the yield curve, using an expanded bond buyback program. But such measures have limited ability to constrain yields against the fundamental forces pushing yields higher and measured against the $1.2 trillion a day that changes hands in the Treasury market.
BMO Capital Markets strategists said a more active buyback program could help limit selling pressure but "fails to address the prevailing fundamental drivers of the upward pressure on 10- and 30-year yields."
A disorderly move higher in yields caused by stresses in the Treasury market itself would prove more troublesome still.
George Awad, principal at Gibraltar Capital, has highlighted the leveraged hedge-fund exposure underpinning the Treasury market, including trading based spreads between cash and futures. Higher funding costs, margin requirements or increased volatility could force leveraged investors to simultaneously unwind positions, amplifying any sell-off.
For now, investors appear willing to tolerate higher yields. BMO noted that when the 10-year reached 4.85%, weakness in equities remained modest and the S&P 500 was still up more than 11% for the year.
