Wednesday 23 September was one of the sharpest days of the year in the US Treasury market. The two-year yield rose 14 basis points, the ten-year 15, and the thirty-year 11.
And what that left at the close were levels not seen in years - and, at the long end, in more than two decades.
Every yield here is a closing yield from the US Treasury's own data, and the historical comparisons were computed from its files.
Errors or inaccuracies are possible. Spotted something that looks wrong? Write to me and I will correct it.
In brief:
- The 30-year yield is the highest since February 2002, and the ten-year the highest since July 2007.
- The move is not about inflation: inflation expectations rose two basis points that day.
- Everything else is real yield - the highest since November 2008.
- And four things pushed it on the day, led by a very strong macro print.
The Move, Across the Whole Curve
| 22 September | 23 September | Change | Last time at this level | |
|---|---|---|---|---|
| Two-year | 4.71% | 4.85% | +14 | June 2024 |
| Five-year | 4.83% | 4.99% | +16 | July 2007 |
| Ten-year | 4.96% | 5.11% | +15 | July 2007 |
| Twenty-year | 5.33% | 5.45% | +12 | June 2004 |
| Thirty-year | 5.29% | 5.40% | +11 | February 2002 |
So the entire curve moved together, and the short end moved hardest.
And the 30-year line deserves a pause: 5.40% is what the US government pays today to borrow for thirty years - and it has not been here since February 2002, nearly twenty-five years ago.
And the Decomposition That Explains What Actually Happened
A conventional bond's yield is made of two parts: the real yield - what the investor demands above inflation - and inflation expectations. The Treasury also issues inflation-linked bonds, so the two can be separated precisely.
For the ten-year, in a single day:
| 22 September | 23 September | Change | |
|---|---|---|---|
| Nominal yield | 4.96% | 5.11% | +15 basis points |
| Real yield | 2.63% | 2.76% | +13 basis points |
| Implied inflation expectations | 2.33% | 2.35% | +2 only |
Of 15 basis points, 13 are real and just two are inflation.
And 2.76% is the highest ten-year real yield since 25 November 2008.
And that is what makes this day particularly interesting. The print that lit the move was distinctly inflationary - a survey showing input costs at a four-year high. And yet the market barely touched inflation expectations.
What it did instead was raise the price of money - pricing higher rates, for longer. It is an odd sort of vote of confidence: the market is saying the Fed will control inflation, and that the price will be a high real rate over time.
The Four Drivers
1. The flash purchasing managers' index - the immediate trigger.
The composite index jumped to 58.4 from 56.0 in August - the fastest pace since July 2021, and well above forecasts. And in the same survey: input costs at their fastest pace since October 2022, with the rise attributed mainly to fuel and freight.
2. The five-year auction, the same day.
Per the Treasury's own auction results:
| 26 August | 23 September | |
|---|---|---|
| Auction yield | 4.393% | 5.033% |
| Bid-to-cover ratio | 2.37 | 2.21 |
| Share left with primary dealers | 8.9% | 13.6% |
| Share via indirect bidders (including foreign) | 54.3% | 47.0% |
So the rate the government paid jumped 64 basis points inside a month, and demand was weaker.
3. And from the Fed - a hawkish tone.
The president of the Boston Fed said on 22 September that she had supported the rate increase, and that she sees a rising probability of scenarios in which inflation stays "meaningfully above 2%", and that a "somewhat restrictive" rate would help bring it back to target. (The quotes come from reports of her remarks; I could not find the full text on the Boston Fed's site.)
4. And oil turned back up.
After a week of sharp declines, oil prices reversed higher again amid the escalation in the Gulf. More expensive oil feeds directly into the input costs that survey measured - closing the loop with the first driver.
And What Happened Today
Today, 24 September, the Treasury sold $44 billion of seven-year notes - and that auction looked better than yesterday's: the yield came in at 5.085%, the bid-to-cover ratio at 2.42, and the share left with primary dealers fell to 10.8%.
(As these lines are written trading on Wall Street has not yet closed, and the Treasury's official closing data for today has not yet been published. The yields in this article are therefore those of 23 September - the last day whose data is final.)
Who This Touches
Mortgages. The ten-year yield is the anchor for US mortgage rates. The article we published yesterday on Berkshire's Lennar purchase described a housing market with 4.9 months of supply - the highest in more than a decade - and with 38% of builders cutting prices. This move in yields adds pressure in exactly that place.
Equities. A higher real rate lowers the present value of future earnings - and that hurts companies whose profit is further away in time. It does not mean stocks have to fall, but it changes the reference point.
And the Fed. The policy rate was raised a week ago to 3.75% to 4%, and the dot plot showed 16 of 18 participants expecting at least one more increase this year. The move in the bond market says the market is listening.
הזווית שלי
דעה אישית של אילן אברמוב - לא ייעוץ ולא המלצה
What I take from this day is that the market answered the question everyone is asking - and the answer was not the one people expected.
The print that arrived was inflationary: input costs at a four-year high. The intuitive reaction should have been a jump in inflation expectations. It did not happen - they rose two basis points.
What jumped was the real price of money, to a level not seen since November 2008. In other words the market is not saying "the Fed will lose control". It is saying "the Fed will fight, and it will be expensive for a long time". The difference between those two statements is the difference between a crisis and a new rate environment.
And what stands out most to me is the 30-year line. A yield of 5.40% is not just a high number - it is a number that has not been here since February 2002. Anyone managing a portfolio built during a decade of zero rates is looking at an entirely different reference point from the one they got used to.
And I want to guard against two hasty conclusions. The first: one day is not a trend, and a purchasing managers' survey is not output. The second: a high yield is not a forecast of a higher yield - it is a price set today. What it does do is raise the bar every other asset is measured against.
(It is important to stress: this is my personal opinion only, and nothing herein constitutes a recommendation to take any action or a rate forecast.)
Ilan Abramov, the author, or anyone on his behalf may hold some of the securities or funds mentioned in this article.
