US 10-year yield tops 5% as markets price Fed hike

The US 10-year Treasury yield climbed to 5% on Monday, reaching its highest level since October 2023 as investors positioned for the Federal Reserve’s interest-rate decision later this week.

The benchmark yield hit a high of 5.014%, but traded at 4.99% at the time of writing, while the 2-year Treasury yield rose more than 2 basis points to 4.666%.

The 30-year Treasury yield also gained 2 basis points to 5.374%.

The moves came ahead of the Federal Reserve’s policy meeting on Tuesday and Wednesday.

Markets have increasingly priced in a 25-basis-point rate hike, with the CME Group FedWatch tool putting the probability at 90%. Prime Terminal showed the odds at 93%.

Treasury yields climb as Fed decision nears

The 2-year Treasury yield, which is particularly sensitive to expectations for Federal Reserve policy, reached its highest level since July 2024 last week.

The latest increase in yields followed August consumer price index data released Friday.

The inflation reading matched expectations but remained well above the Federal Reserve’s 2% target.

The CPI report was the final major inflation indicator available to the Fed before its September meeting.

Investors will also be watching the central bank’s updated economic projections and its “dot plot” for indications about the future path of interest rates.

Jay Woods, chief market strategist at Freedom Capital Markets, said a rate hike would be “the cleaner decision” based on the economic data and current market expectations.

Woods also said markets had already priced in a hike and could rally following the decision.

Conversely, he warned that leaving rates unchanged could trigger a negative reaction because it could suggest the Fed remains behind the curve.

Why the 5% Treasury yield matters

The 10-year yield has reached a psychologically important 5% level.

A move above 5.02% would take it to its highest level since July 2007, before the Global Financial Crisis.

The reasons behind rising yields are important for financial markets.

Higher yields driven by strong economic growth can have different implications for stocks and the wider economy than increases caused by inflation, rising government deficits or stress in the Treasury market.

However, the 5% level could become more challenging for equities if investors demand greater compensation for inflation and fiscal risks.

Large federal deficits, heavy debt issuance and persistent inflation have contributed to a rising term premium, or the additional yield investors demand for holding longer-term bonds.

Oil prices add to inflation concerns

Rising crude oil prices have added another potential source of inflation pressure as the US-Iran conflict escalates.

The latest increase in energy prices, along with a Houthi attack on the Saudi Arabia East-West pipeline, has contributed to higher oil prices amid concerns about potential supply disruptions.

Treasury Secretary Scott Bessent has sought to ease pressure at the longer end of the yield curve through an expanded bond buyback programme.

However, BMO Capital Markets strategists said a more active programme could limit selling pressure but would not address the fundamental forces pushing 10- and 30-year yields higher.

Investors are also monitoring risks from leveraged hedge-fund positions in the Treasury market.

For now, investors have tolerated higher yields.

BMO noted that when the 10-year yield reached 4.85%, equity weakness remained modest and the S&P 500 was still up more than 11% for the year.

The rise in Treasury yields has also supported the US dollar. The Dollar Index was up nearly 0.60% at 99.66 after rebounding from 99.07.