The cost of lending to the US government rose to its highest level in more than two decades on Monday, as the benchmark 10-year Treasury yield pushed through 5.3% and investors braced for fresh clues on the Federal Reserve’s next move.
At one point in the session the 10-year yield jumped about seven basis points to 5.349%, the highest reading since early April 2002. It later settled near 5.31%. The 30-year bond yield rose to around 5.67%, after briefly touching 5.70%, a level last seen in late May 2002. The 20-year yield also reached a 52-week high above 5.7%.
A six-week selloff
The move extends a bond-market retreat that has lasted roughly six weeks. Since the end of last year, the 10-year yield has risen by more than a full percentage point, climbing from about 4.15% to above 5.3%. Because bond prices move in the opposite direction to yields, investors holding long-dated government debt have endured sizeable losses.
Last Friday offered only a brief respite. A weaker-than-expected September jobs report pulled yields lower and reduced the likelihood that the Fed would raise rates again this month. By Monday, however, selling returned, concentrated in longer maturities. Shorter-dated yields barely moved, and the two-year yield edged lower, which left the gap between two-year and ten-year yields at roughly half a percentage point. A widening gap of that kind suggests investors are demanding extra compensation for holding debt over long periods, rather than simply betting on higher short-term rates.
What is driving yields higher
There is no single explanation, and economists are divided on how much weight to give each factor.
Inflation is one. Price pressures have proved stubborn, and the Fed lifted its benchmark rate by a quarter of a percentage point last month to a range of 3.75% to 4%, its first increase in three years. Markets now debate whether another move will follow this year.
Energy is another. Oil prices have been testing $100 a barrel amid the conflict involving Iran, feeding concerns that inflation could stay elevated. Heavy corporate bond issuance and the repositioning of fast-moving investors have added to the pressure on prices.
Then there is the government’s own borrowing. Analysts at TD Securities noted that stronger economic growth, expectations of Fed hikes and higher oil are all part of the story alongside fiscal concerns, and argued that the surge does not yet amount to a debt crisis.
The fiscal question
Still, the numbers on public finances are hard to ignore. The Congressional Budget Office projects that federal debt held by the public will reach about 101% of the size of the economy in fiscal 2026. Net interest costs came to roughly $1.05 trillion over the first eleven months of the fiscal year, and TD estimates the full-year bill at around $1.1 trillion, a figure that will keep climbing if rates stay high.
There is one cushion. The average interest rate on outstanding Treasury securities, excluding short-term bills, is only about 3.1%, because much of the debt was issued when rates were far lower. As older bonds mature and are replaced with new borrowing at today’s rates, that average will drift up.
The concern is not confined to Washington. Speaking to CNBC’s Squawk Box Europe, a senior Goldman Sachs executive said governments across the Western world are grappling with rising borrowing costs and should rein in spending to keep them in check.
Why households should care
Treasury yields are not an abstract number. The 10-year yield acts as a reference point for mortgage lenders, corporate borrowers and many other loans. When it rises, the cost of buying a home, financing a car or refinancing a business loan tends to follow. Savers can benefit from higher returns on new bonds and deposits, but anyone who needs to borrow faces a tougher market.
The week ahead
All eyes now turn to Wednesday, when the Fed publishes the minutes of its September meeting. Traders will read them closely for signs of how divided officials are about further increases. According to the CME Group’s FedWatch tool, the chance of an October hike has fallen to roughly one in four, but the odds of at least one more increase before the end of the year remain high.
If the minutes lean hawkish, longer-dated yields could test fresh highs. If they sound more cautious, the bond market may find its footing. Either way, the 5% threshold that once seemed remote for the 10-year note has now been crossed, and investors are adjusting to a world in which the government’s borrowing costs look structurally higher.
This article is for information purposes only and does not constitute financial advice.
