The US 10-year Treasury yield rose to 5.135% amid mounting inflation concerns and weak demand at a bond auction, reaching its highest level since July 2007.
The two-year Treasury yield reached 4.947%, its highest level since May 2024, while the 30-year yield tested 5.43%, its highest level since June 2007.
Gap between Treasury yields narrows
The gap between the US two-year and 10-year Treasury yields narrowed to 18 basis points for the first time since February 2025. The convergence of short-term rate expectations with long-term rates strengthened forecasts that monetary policy would remain tighter.
Analysts say the two-year Treasury yield is more sensitive to expectations for the US Federal Reserve's monetary policy. The 10-year Treasury yield, meanwhile, is more strongly influenced by expectations about the persistence of inflation.
There have been periods when economic and financial stress increased as the 10-year Treasury yield rose above 5%. However, analysts emphasize that this level alone is not an indicator of a crisis. The 10-year inflation-linked Treasury yield also rose to 2.35%.
Oil prices and inflationary pressure
As diplomatic contacts were expected to intensify during the 81st United Nations General Assembly in New York, no satisfactory development emerged. Concerns that geopolitical tensions between the United States and Iran could continue until the congressional midterm elections in November prevented the expected easing in oil prices.
Brent crude rose above $100 a barrel again. With the possibility that the conflict could drag on, the link stretching from oil prices to inflation and from interest rates to bond yields once again came to the fore in markets.
Data indicating that economic activity remained strong in the United States alongside high oil prices heightened concerns that inflationary pressures could intensify and that the Fed could take more forceful steps.
The US manufacturing Purchasing Managers' Index rose to 57 in September, reaching its highest level in 52 months and exceeding market expectations. The services PMI also reached a 59-month high of 58.7.
Expectations for a rate hike rise
Analysts said that while the US economy remains strong, rising energy costs could lead the Fed to pursue tighter monetary policy. Market pricing showed that the probability of the bank raising its policy rate by 25 basis points next month had risen to 70%.
Tim Waterer, chief market analyst at KCM Trade Global, said that services and manufacturing PMI figures coming in above expectations in the United States and parts of Europe had revived concerns that central banks could implement more aggressive rate hikes than previously anticipated.
Waterer said the change in rate expectations had pushed the US 10-year Treasury yield above 5.1%. He said investors faced the risks of persistently high inflation on the one hand and tighter monetary policy weakening economic growth on the other, adding that this picture reduced market appetite for bonds and increased the risk premium demanded to carry government debt.
