10-Year Treasury Yield Jumps As Markets Bet On Two Fed Rate Hikes. Bessent Won't Fight It.

• S&P Global PMI index jumped to 58.4 in September from 56, the fastest expansion since July 2021, with employment reaching a four-year high of 55.4
• Markets now price 71% odds of a Fed rate hike on Oct. 28 and 55% odds of a 50 basis point increase by December, up from 55% and 42% respectively the prior day
• The 10-year yield influences 30-year mortgage rates and serves as the risk-free rate for stock valuations, though it remains below the 6% level reached in 1999 before the dot-com bubble

Market Summary: 10-Year Treasury Yield Surges Past 5%

Key Developments

The 10-year Treasury yield jumped 12 basis points to 5.09% on Wednesday, reaching a 19-year high as markets price in additional Federal Reserve rate hikes. This surge followed stronger-than-expected economic data and signals continued inflationary pressures.

Economic Data

The S&P Global PMI for U.S. output surged to 58.4 in September from 56.0 in August, marking the fastest expansion since July 2021. The employment subindex climbed to a four-year high of 55.4 from 53.3, both well above the 50-level threshold indicating growth. U.S. crude oil prices also rebounded to approximately $92 per barrel, adding upward pressure on yields.

Fed Policy Expectations

Markets now price in 71% odds of a Fed rate hike on October 28, up from 55% Tuesday. There's a 55% probability of a 50-basis-point increase by the December 9 meeting, rising from 42% previously. This follows the Fed's first rate hike since 2023, with Chairman Kevin Warsh indicating more tightening may be necessary.

Treasury Buyback Strategy

Treasury Secretary Scott Bessent maintained the $6 billion ceiling for long-term Treasury bond buybacks, signaling unwillingness to fight market forces. The September 10 buyback attracted only $5.2 billion in bids, suggesting Bessent won't attempt to artificially suppress yields.

Market Impact

The S&P 500 declined 0.7% Wednesday afternoon but remained just 0.4% below its August 13 record high, up 13.4% year-to-date. The Nasdaq composite fell 1.1% after hitting a record high the prior session. The yield increase raises concerns about stock valuations and mortgage rates, though the damage has been modest thus far.