The bond market has been sending a loud signal this week: yields on US government debt have climbed to their highest levels in nearly twenty years, and stocks have wobbled in response.
On Thursday, the 10-year Treasury yield, which helps set mortgage rates, jumped to 5.11%, its highest level since 2007. The 2-year note climbed to 4.897%, the highest since 2023, while the 30-year bond touched a post-2004 peak above 5.4%. A day earlier, the 5-year Treasury crossed 5% for the first time since 2007. The selloff in bonds, which pushes yields higher as prices fall, has been building since the Federal Reserve's September 16 meeting, when the Federal Open Market Committee voted unanimously to raise its benchmark rate by a quarter point to a range of 3.75% to 4%, its first increase since July 2023. Updated projections released that day showed 16 of 18 Fed officials expect at least one more increase before year end.
The move caps a winding path for the Fed. It cut rates three times in the fall of 2024, held steady through most of 2025, then cut three more times last September before reversing course entirely this month. Fed Chair Kevin Warsh has been pointing to inflation still running well above the central bank's 2% target as the reason for the shift. That message has been reinforced by fresh economic data: a purchasing managers survey released this week showed US business activity growing at its fastest pace in more than five years, which JPMorgan economists said was consistent with roughly 5% annualized economic growth, but the same survey also showed the prices companies are paying rising sharply, which investors read as a sign of more inflation still working through the pipeline.
Analysts caution that higher oil prices and heavy borrowing by technology companies racing to build AI data centers are also playing a role in pushing yields up, alongside the more straightforward inflation story. US stocks have largely absorbed the shock so far: the Dow Jones Industrial Average fell for a third straight session on Thursday, down 161.61 points, or 0.3%, to 51,349.98, while the S&P 500 and Nasdaq Composite each ended the day roughly flat.
Markets are now pricing in the possibility of another quarter-point Fed rate increase in December, which would extend a tightening cycle that began just this month.
Why are Treasury yields rising so fast?
A combination of persistent inflation, strong economic growth data, higher oil prices and heavy borrowing tied to AI data center construction is pushing long-term yields higher, according to market analysts.
What did the Fed decide this month?
On September 16 the Fed raised its benchmark interest rate by a quarter point to a range of 3.75% to 4%, its first increase since July 2023.