US Treasury yields eased slightly on Tuesday after climbing to fresh highs the previous session.
However, the bond market remained on track for its worst month in years as rising energy costs and AI-driven growth push investors to price in higher rates for longer.
The 10-year Treasury yield, the benchmark for mortgage rates, auto loans and credit card debt, was flat at 5.2%.
The 30-year yield eased 1 basis point to 5.5%, while the 2-year yield, which tracks short-term Fed policy expectations, rose 1 basis point to 4.9%.
On Monday, both the 10-year and 3-year yields jumped 5 basis points, and the 2-year rose 6 basis points.
Sharpest monthly move since 2022
The 10-year yield, which pushed above 5% for the first time since 2023 earlier this month, is on track for its biggest monthly rise since 2022, up about 50 basis points.
Two-year Treasury yields have surged almost 60 basis points in September, on pace for their steepest monthly jump since early 2023.
The ICE BofA MOVE index, a measure of bond market volatility, has jumped almost 30% this month, its largest increase since March, when the Iran war began and triggered an earlier energy shock.
Data last week showed the average rate on a 30-year US mortgage has climbed to its highest level in more than two years.
Global government bonds are moving in tandem.
Two-year borrowing costs in France, Germany, Britain and Australia are set for their sharpest monthly increases since March, and Japanese government bond yields remain pinned near multi-decade highs.
But the US market is where the pressure is most acute, given the scale of Treasury issuance and its role as the world’s benchmark risk-free rate.
Why yields keep climbing
The seven-month Iran war continues to weigh on energy prices, fueling expectations of further Federal Reserve rate hikes to contain inflation, itself worsened by rising government debt.
Traders are pricing in a more than 72% chance of another Fed rate hike at the October meeting, according to the CME FedWatch tool.
That follows the Federal Open Market Committee’s unanimous 12-0 vote earlier this month to raise its benchmark rate by 25 basis points to a range of 3.75% to 4%, its first hike since 2023.
The US and Iran held separate talks with mediators on Tuesday aimed at resolving the conflict.
Competition for capital is adding to the pressure on yields.
Bond sales from hyperscale technology companies funding AI infrastructure have more than doubled this year to over $200 billion, according to LSEG data, competing directly with Treasuries and other government debt for investor demand.
What’s next for markets
A cluster of US economic data this week will shape the near-term path for yields and the Fed’s next move.
The core PCE inflation index, the quarterly GDP print, and Friday’s nonfarm payrolls and unemployment figures are all due before the October FOMC meeting.
Any upside inflation surprise would likely push the odds of an October hike higher still, while a weaker jobs or growth reading could ease some of the pressure building in the bond market.
October brings further tests beyond the US calendar too, including French budget talks, a UK budget, and likely more bond issuance from technology firms funding AI buildouts.
All of this could keep global yields elevated even if the domestic US data comes in mixed.
This post Bond markets flash worst-month warning as yields test 2007 highs may be modified as updates unfold
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