• The 10-year Treasury yield hit 5.34% and the 30-year reached 5.70%, the highest since 2002, before easing slightly.
  • Persistent inflation, resilient economic activity, and heavy government borrowing are driving the selloff, with ISM Services Prices Paid jumping to 74.0.
  • Markets are pricing a roughly 25% chance of an October Fed hike and a full 25 basis point increase by December, though odds fluctuate with each data release.

A Global Bond Rout

The selloff in U.S. Treasuries deepened this week, pushing long-term yields to levels not seen in over two decades. The 10-year note briefly touched 5.34% and the 30-year bond climbed to 5.70% intraday, marking the highest yields since 2002. By October 5, yields had pulled back slightly—the 10-year hovered around 5.25% and the 30-year near 5.60%—following weaker-than-expected jobs data that tempered expectations for an immediate Federal Reserve rate hike. Still, the move caps a quarter that Reuters described as the largest rise in Treasury yields this century.

The surge reflects a broader repricing of the long-term outlook rather than just anticipation of another Fed hike. Investors are demanding greater compensation for risks ranging from stubborn inflation to soaring federal deficits. "The market is waking up to the reality that rates will stay higher for longer," said one fixed-income strategist, who asked not to be named to speak freely. "This isn't just about the next Fed meeting; it's about the next decade."

Drivers Behind the Move

Several forces are converging to lift yields. Inflation remains well above the Fed's 2% target, and the latest ISM Services Prices Paid index—a key gauge of input costs—jumped to 74.0, the highest since July 2022. That reading suggests price pressures are embedded in the services sector, which could keep the Fed vigilant. Meanwhile, the U.S. economy continues to expand at a solid pace, supported by resilient consumer spending and an AI-driven investment boom in data centers, chips, and power infrastructure. This capital-intensive spending is increasing demand for financing, adding upward pressure on yields.

On the fiscal side, large federal deficits mean the Treasury must issue a steady stream of debt, and investors are demanding a higher term premium to absorb that supply. "The combination of heavy issuance and elevated inflation expectations is a potent mix," noted a portfolio manager at a major asset manager. "It's pushing yields up across the curve."

A Global Phenomenon

The selloff is not confined to the U.S. Britain's 30-year government bond yield surpassed 6%, its highest since 1998. European and Asian factory activity also showed strength, partly linked to AI-related investment, reducing the urgency for central banks there to ease policy. Higher U.S. yields can attract global capital into dollar assets, tightening financial conditions abroad and raising dollar funding costs for countries and firms that borrow in dollars.

The Fed raised its policy rate by 25 basis points on September 16 to a range of 3.75%–4.00%, and officials have not ruled out further increases. Market-implied odds of an October hike have fluctuated, recently around 25%, with a full quarter-point increase priced by December. The October 27–28 FOMC meeting looms as the next major catalyst.

Implications for Borrowers and Investors

The surge in yields has immediate consequences. Mortgage rates, which track the 10-year Treasury, are already above 7.28% for a 30-year fixed loan, making homeownership less affordable. Businesses face higher hurdle rates for investment and rising debt-service costs, particularly for leveraged firms and commercial real estate. Governments will pay more to refinance debt, straining budgets.

For savers and bond investors, the shift offers the highest nominal yields in years. But existing holders of long-duration bonds have suffered price losses. Equity valuations, especially for long-duration tech stocks, are under pressure, though strong AI-related earnings expectations have provided some offset.

The debate now centers on whether yields will settle structurally higher. Some analysts argue the AI investment cycle can sustain elevated rates, while others warn that a slowdown in capital spending or broader economic weakness could reverse the move. "The risk is a feedback loop," said a strategist at a large bank. "Higher yields could eventually slow growth, but if inflation and borrowing needs persist, the adjustment will be slow and volatile."

Correction: An earlier version of this article stated the 10-year yield reached 5.34% and the 30-year 5.70% on October 5. In fact, those were intraday highs reached earlier in the week; by October 5, yields had eased to around 5.25% and 5.60%, respectively.