US 10-year yields surge 16 bps to highest level since 2007

The bond market faces a significant challenge.

US borrowing expenses are climbing sharply, reaching their highest point since 2007. This represents a steep cost for the $40 trillion in US government debt. Over the past week, the two-year yield has risen 15 basis points to 3.60%, while the 10-year yield gained 16 basis points to 4.19%. The 30-year yield rose 18 basis points. Real yields also advanced, climbing 10 basis points to 1.85%.

The sell-off has been most pronounced in longer-term debt, which is more sensitive to economic and inflation expectations rather than Federal Reserve policy. Yields have been steadily rising throughout September after hitting a low near 3.60% on the 10-year in mid-month.

These expenses indirectly influence mortgage rates, corporate borrowing costs, and the discount rate applied to equities.

What concerns me now is how rapid and widespread the move has been. It resembles a dam giving way, which bodes poorly for risk assets and confidence in policymakers. On the long-term monthly chart, 5.33% stands as the financial crisis high, and beyond that there is little to prevent a climb to 6%.

This is the sort of development that will enrage Trump, yet there is little that can be done. The Treasury purchased another $6 billion in long-dated bonds using bills today, but that is a minor measure and has lost its impact. Ending the conflict in Iran and reducing oil prices would provide substantial relief, but it will take time to restore flows, and the market has suddenly grown skeptical of yesterday's statements, with oil rising $2.11 to $92.67.

The catalyst for today's moves was the US S&P Global PMI, which reached a five-year high. The composite reading was the strongest since 2015, excluding the post-pandemic period.

The rationale is that the US economy is accelerating due to tax cuts, substantial government spending, deregulation, and the AI capital expenditure boom. Meanwhile, the anticipated job losses from AI have not yet materialized. This is just one data point, but it could gain momentum as confidence in the growth outlook strengthens.