- Surge. The US 10-year Treasury yield rose to 5.17% on September 25 — its highest level since October 2007 — while the 30-year topped 5.5%, levels not seen since 2004, as two distinct forces hit the bond market simultaneously.
- Drivers. A US business activity survey reached a more-than-five-year high in September, raising expectations of another Federal Reserve rate hike in October. On the same day, demand was weak at a $70 billion 5-year Treasury auction, forcing dealers to absorb supply at elevated yields.
- Consequence. Rising long-term yields increase the cost of mortgages, corporate debt, and government borrowing — piling additional pressure on an economy where the Fed only just raised rates to 3.75%–4.00% in a unanimous vote last week.
The bond market selloff on September 25 was driven by the convergence of two pieces of data that both pointed in the same direction: higher rates for longer. A flash US composite Purchasing Managers’ Index reached its highest reading in more than five years, suggesting the economy remains too resilient for the Federal Reserve to pause its tightening cycle. Hours later, a $70 billion 5-year Treasury note auction attracted notably weak demand, with primary dealers forced to take a larger-than-expected share of the issue — pushing yields across the curve higher as the market adjusted to the supply.
The numbers
The 10-year yield finished September 25 at 5.17%, its highest close since October 2007. At one point during the session it rose as high as 5.13% intraday, before a further leg up extended the close. The 2-year note, more sensitive to near-term Federal Reserve expectations, ended at 4.81%. The 30-year bond yield touched 5.53% intraday, a level last seen in 2004, according to data tracked by Bloomberg.
Markets are now pricing in roughly a 67% probability of a further 25 basis-point Federal Reserve hike at its October meeting. Updated FOMC projections from last week’s meeting showed 16 of 18 officials see at least one more hike in 2026, with four pencilling in two additional increases.
The oil-inflation feedback loop
Rebounding oil prices amplified the bond selloff through the inflation channel. Brent crude had pulled back toward $97 following the Xi-Trump White House summit but moved back above $100 in the days that followed as US-Iran tensions remained elevated. Higher energy costs feed directly into headline CPI, which held at 3.4% year-on-year in August — well above the Fed’s 2% target and unchanged from the previous month.
Some relief arrived on Friday, September 26, when oil eased on reports that US and Iranian negotiators may be exploring a phased agreement to reopen the Strait of Hormuz. That provided a modest rally in Treasuries, though yields remained at multi-year highs. For context on how the global bond rout has spread beyond the US, see the earlier analysis of gilts and Japanese yield spikes earlier this month.
Implications for borrowers
A 10-year yield at 5.17% flows through quickly to mortgage rates — the US 30-year fixed mortgage is now tracking above 8% — adding to affordability pressures in the housing market. For the US Treasury, higher long-term rates increase the cost of rolling over the federal debt pile, which the Joint Economic Committee reported at $2.67 trillion net new borrowing in the first eight months of fiscal 2026. The combination of a hawkish Fed and weak auction demand suggests the bond market is beginning to price in a “higher for longer” environment that extends well into 2027.