US yields hit multiyear highs as oil surge spurs Fed bets

As per the latest business developments, Yields on US government bonds rose to fresh multiyear highs as crude prices extended their surge, prompting traders to add to bets that the The US central bank will raise interest rates as soon as the week ahead.

Treasury yields rose by five to 10 basis points across maturities, with the 30-year benchmark reaching marks last noted in 2007 and the two-year note yield exceeding 4.5% for the first time since 2024. Traders boosted expectations for a Fed interest-rate gain the week ahead to around 70% and fully priced in a move by October instead of December.

The 10-year note’s yield rose as much as nine basis points to 4.93%, last noted in November 2023. In Treasury options trading, flows included the purchase for around $14 million of a put on the 10-year note futures contract, anticipating the corresponding yield will reach 5% by its Nov. 20 expiration date.

“Oil drives inflation, and if it starts getting into the system it’s going to be hard to contain it,” stated Tony Farren, managing director in rates sales and trading at Mischler Financial Group. “There’s no reprieve for yields to go softer if inflation stays elevated.”

Benchmark crude prices advanced more than 5% to the highest since May, advancing toward peak marks touched since the US attacked Iran in late February.

Rising energy prices hit government bond markets globally, with UK two-year yields climbing 17 basis points. Euro-zone bond markets slumped after the European Central Bank boosted interest rates Thursday by a quarter point to 2.5%, as anticipated. The second gain since the Iran war began was based on signs inflation will stay “well above target for an extended period,” the ECB stated.

A US report on producer prices released Thursday revealed increases that were largely in line with economist expectations. Bond market participants are more keenly interested in Friday’s consumer price index data as a determinant of what the Fed will do on Sept. 16.

The Treasury selloff lifted the anticipated yield for an auction of 30-year bonds at 1 p.m. New York time. The $22 billion reopening of last month’s new offering had an indicated yield of around 5.35%, elevated than 30-year auction results going back to 2001.

Shortly after the auction, the Treasury Department is slated to buy back as much as $6 billion of debt in the 10- to 20-year sector, having increased the targeted amount from $2 billion. The buyback expansion, unveiled in a surprise announcement on Aug. 19, is aimed at controlling the climb in long-term Treasury yields.

The current buyback program, begun in 2024, targets older securities that aren’t frequently traded. Its objective is to improve market functioning by concentrating issuance in more liquid instruments.

There have been 25 operations targeting the 10- to 20-year maturity band since then, each for up to $2 billion, with that amount accepted in each. Dealer offers to sell ranged from around $7 billion to as much as $36 billion — or 3.2 times to 18 times the amount accepted, with an average offer-to-cover of 9.6 times, Treasury Department data show.

While rising crude prices have pressured the market, bond yields globally are additionally rising in response to expansion in the supply of debt securities, both from governments financing deficits and from firms funding capital expenditures.

Bank of America projected that net Treasury supply will gain to around $2.3 trillion in 2028 from $1.9 trillion this year, in part because expansion in the total debt caused annual interest expense to double during the past five years to more than $1.2 trillion.

Investor anxiety around US government spending has been stoked further by the prospect of a protracted war in the Middle East. A pledge by US President Donald Trump in a late-Wednesday speech to give all adult US citizens a $5,000 dividend if Republicans retain control of both houses of Congress at the November mid-term elections — though viewed as unlikely to be kept — additionally was viewed as a threat to the fiscal outlook.

In the meantime, investment-grade corporate bond sales set records in four of the past eight months, including the last three, and volume is tracking 7.6% above 2020 marks, when a record $1.75 trillion was sold. A seasonal surge the current week, predicted to total $70 billion, had touched $61 billion by Wednesday.