U.S. Treasury bonds are on track for their most challenging September since 2023, with elevated oil prices and anticipated interest rate hikes from the Federal Reserve contributing to the trend. Yields on long-term bonds have surged to multidecade highs in recent weeks. As of Tuesday, the 10-year Treasury yield was at 5.24%, while the 30-year yield approached 5.56% and the 2-year yield stood at about 4.93%.
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Though the stock market remains stable, Wall Street is closely monitoring the 10-year yield's critical threshold of 5.5%. Hardika Singh, a strategist at Fundstrat, noted that historical data suggests valuations tend to compress when yields exceed this level, necessitating a reassessment of investments across the board.
September has historically been tough for bond prices, which decline as yields rise. In the past decade, Treasurys have seen a median loss of 0.9% in September and 0.7% in October, according to Bloomberg data. This seasonal trend coincides with a market already strained by external factors.
Rising oil prices are exacerbating inflation expectations, increasing the likelihood of more rate hikes from the Fed. Currently, traders estimate a 70% chance of a rate increase at the Fed's upcoming meeting in October, according to CME Group's FedWatch. Ed Yardeni from Yardeni Research noted that the increase in yields may partly result from unwinding the yen carry trade, where investors borrow at low rates in Japan to invest in higher-yielding assets abroad. He remarked that this situation may now be causing repercussions for global bond markets.