Here's how the rise in the 10-year Treasury yield stacks up relative to history
Wall Street is grappling with a large jump in Treasury yields this quarter.
Yields in the global bond market have risen with startling speed over the past few months, and the more than $30 trillion market for U.S. government debt certainly hasn't been immune.
A challenging brew of catalysts - from the ongoing war in Iran to signs of resurgent economic growth in the U.S. and abroad, along with the immense sums being borrowed to finance the artificial-intelligence build-out - have come together to drive U.S. Treasurys to what could be their worst quarterly performance in a generation, by one measure.
The yield on the 10-year Treasury note BX:TMUBMUSD10Y, widely seen as the market's benchmark, on Wednesday locked in its biggest quarterly increase since the first quarter of 1994, according to Dow Jones Market Data. Bond market prices move inversely with yields.
The rise in yields this quarter surpassed the upswing seen in the third quarter of 2022, when aggressive interest-rate hikes by the Federal Reserve to battle surging inflation led to painful losses in the bond market that year. Yields on longer-dated Treasury notes and bonds have recently traded at their highest levels in decades. The 10-year yield on Wednesday settled at its highest level since 2002.
Investors have highlighted other factors that might be contributing to the move as well, including worries about stubbornly high U.S. budget deficits, and even the unwind of the Japanese yen (USDJPY) carry trade.
The rate on the 10-year Treasury is closely watched, as it influences the cost of trillions of dollars in borrowing for consumers, companies and the U.S. government. It's going up at the same time that inflationary pressures persist in the U.S. economy. Earlier this month, the Federal Reserve raised its policy interest-rate target for the first time in three years, with more rate hikes expected in the months ahead. That should help keep the pressure on bonds, as the Treasury yield curve threatens to invert once again.
Even an official inflation report on Wednesday that came in slightly softer than expected wasn't enough to calm the tumult in the bond market. While long-dated yields fell after the data were released, the decline didn't hold.
While a recent jump in diesel prices heightened concerns that the resulting higher cost of transporting goods and food would fuel broader inflation in the U.S., those fears may be overblown in the near term, Will Kinlaw, State Street's head of data intelligence and market research, told MarketWatch in an interview.
In his view, the market seemed to be overestimating the chance of another Fed rate hike in October, as the climb in diesel prices so far doesn't appear to be causing a spike in grocery prices this month, Kinlaw said, citing State Street data. State Street uses artificial intelligence to help scrape consumer prices from online sources, providing more frequent and recent looks at inflation data than measurements from the government, he noted.
The U.S. Bureau of Labor Statistics will release September data from the consumer-price index on Oct. 14, with the previous CPI reading showing inflation rose 3.4% in the 12 months through August. That left U.S. inflation above the Fed's target but well below the 2022 peak of 9.1% in June of that year.
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Inflation worries have been behind some of the large quarterly jumps in Treasury yields seen in the past - including in the early 1980s, when the Fed was fighting inflation with higher policy rates. For example, the biggest quarterly gain ever for the 10-year Treasury yield was a more than 2-percentage-point jump in the first three months of 1980 to around 12.6%, according to Dow Jones Market Data.
For all the concern over inflation being too high for too long, a market-based measure points to it remaining more anchored over the long term.
The 10-Year break-even inflation rate traded at 2.35% on Tuesday, according to data on the website of the Federal Reserve Bank of St. Louis. That may be a sign of investors deeming the Fed credible in its goal of targeting 2% inflation, after it decided on Sept. 16 to raise its policy rate for the first time since July 2023.
Meanwhile, traders in the federal-funds futures market priced in on Tuesday a 50.9% chance that the Fed would raise its policy rate again in October from its current target range of 3.75% to 4%, according to data from the CME FedWatch Tool. They were dialing back those expectations late-morning Wednesday to a 37.1% probability, after a reading on August inflation from the personal consumption expenditures price index showed that its year-over-year climb eased to 3.4%.
The recent jump in long-term Treasury yields appears to be more of a normalization of interest rates that strikes a strong contrast to the low-rate environment seen after the Fed lowered its policy rate to nearly zero after the 2008 financial crisis, according to Meb Faber, co-founder and CIO of Cambria Investment Management.
The 10-year Treasury rate doesn't appear all that elevated when looking back in history over many decades, although the speed at which it has climbed has been jolting this quarter, Faber said in an interview.
Other long-term Treasurys yields have surged in the third quarter, weighing on the U.S. bond market as it broadly heads for a quarterly loss. The Vanguard Total Bond Market ETF BND, which provides broad exposure to the U.S. investment-grade fixed-income market, was on track to lose 3.5% this quarter on a total-return basis, FactSet data showed at last check Wednesday.
Long-dated bonds that were issued when rates were much lower have been struggling over the past several years.
The yield on the 30-year Treasury bond BX:TMUBMUSD30Y rose Wednesday to 5.638%, to settle at its highest level since June 7, 2002, according to Dow Jones Market Data. The 10-year Treasury yield climbed Wednesday to 5.292%, its highest level since May 14, 2002.
-Christine Idzelis