U.S. Treasury yields surged past 5% on Thursday, driven by strong PMI data and failed bond auctions. The 10-year Treasury yield reached 5.142%, its highest level since July 2007. The 30-year yield also exceeded 5.30%, while the 5-year and 2-year yields hit their highest levels since 2007 and May 2024, respectively. The U.S. Treasury announced a buyback program to purchase up to $6 billion in 20-year and 30-year bonds, marking its second long-term buyback operation of the month.
European bond yields also rose, with Germany's 10-year Bund yield reaching 3.549% and its 2-year Schatz yield advancing to 3.303%, its highest level since September 2023. The strong PMI data for both the U.S. and the euro zone, showing accelerating business activity, contributed to the yield surge. The U.S. flash PMI indicated activity accelerating to a more than 5-year high in September, driven by a surge in new orders. Similarly, the euro zone flash PMI showed business activity accelerating at its fastest pace in over 3 years.
Traders priced in a 70% probability of another quarter-point rate hike at the Fed's October meeting, up from 50% prior to the PMI release. Fed Governor Michael Barr stated that policymakers will likely need to deliver further interest rate increases to bring inflation back to target. Chicago Fed President Austan Goolsbee warned that central bankers may need to treat the ongoing energy shock as a source of persistent inflation rather than a temporary supply blip.
Crude oil futures traded lower at $98.39, down $1.95 or 1.94%, amid geopolitical tensions. Iranian President Masoud Pezeshkian vowed that Tehran would "never surrender," while U.S. President Donald Trump made threats at the UN General Assembly to "annihilate" the Islamic Republic. Yardeni Research suggested that Treasury Secretary Scott Bessent could bring bond yields down by buying back more Treasury bonds and issuing more Treasury bills.
Yardeni Research noted that the 10-year bond yield is expected to remain in the 4.00%-5.00% range this year, mirroring the range during the five years before the Great Financial Crisis. The firm added that a relief rally might require a Middle East war resolution or action from Treasury Secretary Scott Bessent.
