U.S. Treasury Yields Rise Following Strong Economic Data

Yields have surged due to ongoing worries regarding inflation. In August, new orders for essential U.S. manufactured capital goods exceeded expectations, and previous month's data was significantly revised upwards, indicating strong growth in business spending on equipment amid advancements in artificial intelligence. This report followed an S&P Global survey that revealed an uptick in business activity for September.

The positive data has raised expectations for another interest rate hike by the Federal Reserve. Traders are now estimating a greater than 64% chance of an increase during the Fed's meeting in October, up from approximately 55% just a week ago. The Federal Reserve raised rates last week for the first time in 2023 to tackle inflation, which has persisted partly due to rising fuel prices associated with geopolitical tensions involving the U.S. and Iran. Several Fed officials have commented on the necessity of further rate increases to control inflation.

John Luke Tyner, head of fixed income and portfolio manager at Aptus Capital Advisors, stated that the Fed's only option is to slow down demand but cautioned about the risks of raising rates excessively.

On Friday, oil prices eased as investors speculated on a potential truce between the U.S. and Iran, which could lessen upward pressure on yields. Additionally, a $70 billion auction of five-year notes this week saw weak demand, contributing to the recent bond selloff, as bond prices move inversely to yields.

Long-term yields continued to rise this week despite a Treasury buyback operation intended to improve liquidity in the market. Upcoming economic indicators for investors include the September U.S. payrolls report and the personal consumption expenditures price index (PCE), closely monitored by the Fed for inflation trends.

The yield on the 30-year bond was last reported at 5.486%, up 2.4 basis points, peaking at 5.5319%, the highest since 2004. The benchmark 10-year Treasury note yield was up 0.3 basis points at 5.165%, reaching 5.2297%, its highest since 2007. A key segment of the U.S. Treasury yield curve measuring the difference between two-year and 10-year Treasury notes, indicative of economic expectations, stood at 30.3 basis points, while the two-year Treasury yield, which typically aligns with Fed interest rate expectations, decreased by 3.5 basis points to 4.86%.