The 10-year Treasury yield just posted its biggest quarterly jump since 1994, settling at its highest level since 2002 as a global bond-market rout deepens. War in Iran, resurgent growth and heavy AI-related borrowing are pushing yields higher, even as traders argue over whether the Federal Reserve hikes again in October.
The yield on the 10-year Treasury note locked in its biggest quarterly increase since the first quarter of 1994 on Wednesday, according to Dow Jones Market Data. That move outpaces even the painful selloff of the third quarter of 2022, when aggressive Fed rate hikes battered bond prices.
A quarter unlike any in decades
Wednesday's climb pushed the 10-year yield to 5.292%, its highest level since May 14, 2002. The 30-year Treasury bond yield rose to 5.638%, its highest since June 7, 2002. Bond prices move inversely with yields, so the climb has inflicted broad losses: the Vanguard Total Bond Market ETF was on track to lose 3.5% this quarter on a total-return basis, according to FactSet data cited in the report.
Iran, AI spending and deficits behind the rout
A mix of catalysts is fueling the move: the ongoing war in Iran, signs of resurgent economic growth in the U.S. and abroad, and the immense sums being borrowed to finance the artificial-intelligence build-out. Investors have also pointed to worries about persistently high U.S. budget deficits and the unwind of the Japanese yen carry trade as contributing factors.
Inflation data fails to calm the market
An official inflation report released Wednesday came in slightly softer than expected, but the relief did not last — long-dated yields fell initially, then the decline reversed. Earlier in the month, the Fed raised its policy rate for the first time in three years, with more hikes expected ahead.
Traders in the fed-funds futures market had priced in a 50.9% chance of another October rate hike on Tuesday, but that probability fell to 37.1% by Wednesday after a reading on August inflation eased. Will Kinlaw, State Street's head of data intelligence and market research, said the market may be overestimating the odds of an October hike, since a recent jump in diesel prices has not yet shown up in grocery prices.
Still short of the 1980 record
Meb Faber, co-founder and CIO of Cambria Investment Management, called the move more of a normalization after years of near-zero rates following the 2008 financial crisis, even as the speed of the climb this quarter has been jolting. History still dwarfs the current surge: the biggest quarterly gain ever for the 10-year yield came in the first quarter of 1980, a jump of more than two percentage points to around 12.6%.
Source: MarketWatch
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