Global Bond Selloff Pushes U.S. Treasury Yields to 24-Year Highs
Bond yields just hit levels unseen since 2002, and a weak jobs report that should have pushed them lower did the opposite. Three forces are quietly combining to make Washington's borrowing costs spiral in a way the Fed cannot simply…
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Friday’s jobs report came in weaker than expected. That kind of news usually draws bond yields down. This time the 10-year Treasury yield ticked higher anyway and closed at 5.28% on October 2. In recent sessions, it briefly reached 5.34%, its highest since 2002.
Banks and lenders use that rate to price mortgages, car loans and business credit. A year ago the 10-year yield was 4.13%. The quarter that ended in September brought the 10-year’s largest quarterly yield increase this century. The yield has moved from under 4% to over 5.3% within 500 trading days only once before, in June 2007.
Why Bond Buyers Are Charging Washington More
Inflation is part of the story. Consumer prices rose 3.4% in August from a year earlier, and the Fed has raised its target rate’s upper bound to 4.00%. Long-term yields kept climbing after the rise, which suggests investors don’t think one rise is enough.
Still, inflation fears account for less of the move than the headlines suggest. Inflation-protected Treasuries pay a 10-year real yield of 2.92%. That means investors expect inflation of only about 2.36% a year over the decade. Most of the 5.28% yield is extra pay investors want for lending to Washington for ten years.
Three other forces explain that extra pay. The first is supply. Federal debt was 56% of GDP in 2002. Today it is 120%. In August, the Treasury Department doubled its long-bond buybacks from $2 billion to $4 billion to calm the market. The 30-year yield has since risen to 5.63%. Economist Diane Swonk, speaking on Marketplace, called it a “perfect storm”: governments are issuing record amounts of debt at the same time AI data center construction needs huge sums of capital.
The second force is global. Eurozone borrowing costs surged this week. Japan’s 10-year yield is at its highest since 1996, so Japan no longer supplies the cheap money it once did. The third is political. The President is trying to force a Fed governor out through the Justice Department. Investors are pricing in the chance that the Fed gives in to political pressure.
Why the Fed Has No Clean Exit
Each rise in yields adds to federal interest costs. Higher interest costs widen the deficit, and a wider deficit means more borrowing. Raising rates makes that cycle worse. After the July meeting, Fed Chair Kevin Warsh suggested higher long yields could substitute for rate hikes, according to Mike Mitchell of Goldman Sachs (NYSE:GS | GS Price Prediction). Long-term bonds sold off.
That leaves the job mostly to Treasury. The 13-week bill yields 4.11%, well below the 10-year, so Treasury can save money by borrowing more through bills and less through long bonds. It can also buy back long bonds and direct bills to stablecoin issuers and money market funds. Later, the Fed could buy bills “for reserve management.” In practice, it would work like yield-curve control. The cost is more exposure to short-term rates every time the debt rolls over.
For households, this means mortgage rates stay high, while money market savers collect about 4.04% on one-month bills.
What to Watch in October
Watch Treasury’s next quarterly refunding announcement. If it cuts coupon auction sizes and borrows more through bills, Treasury will have taken control of the fix. Also watch the gap between the 10-year and 2-year yields. It widened from 0.20% on September 21 to 0.45%. Stocks remain calm, with the VIX at 16.39. If Treasury holds off, the bond market will set its timeline for it.
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After two decades of patrolling the dark corners of suburbia as a police officer, Rich Duprey hung up his badge and gun to begin writing full time about stocks and investing. For the past 20 years, he’s been cruising the markets looking for companies to lock up as long-term holdings in a portfolio while writing extensively on the broad sectors of consumer goods, technology, and industrials. Because his experience isn’t from the typical financial analyst track, Rich is able to break down complex topics into understandable and useful action points for the average investor. His writings have appeared on The Motley Fool, InvestorPlace, Yahoo! Finance, Money Morning, and, of course, 24/7 Wall St. He has been featured in both U.S. and international publications, including MarketWatch, Financial Times, Forbes, Fast Company, and USA Today.
