The sell-off in U.S. government debt is deepening as investors price in an interest rate hike this week.The sell-off in U.S. government debt is deepening as investors price in an interest rate hike this week.
The benchmark 10-year Treasury yield
The 10-year yield was last up more than 3 basis points to around 5%. Earlier in the session, it scaled to 5.041%, the highest since July 2007. One basis point equals 0.01 percentage point, and yields and prices move in opposite directions.
The yield on the longer-dated 30-year Treasury bond, more sensitive to geopolitical risks, rose 4 basis points to 5.368%. The yield had hit a high of 5.401% — also its highest level since June 2007.
The 2-year Treasury note yield climbed more than 1 basis point to 4.648%. It had earlier reached its highest level since July 2024 at 4.688%.
The move comes at the start of the Fed’s two-day policy meeting, with markets pricing in higher chances of a quarter-point rate hike when the meeting concludes Wednesday after August inflation remained well above the central bank’s 2% target. Traders are pricing in a more than 92% chance that the Fed will raise rates by 25 basis points in its latest meeting, according to the CME FedWatch tool.
“U.S. 10-year treasuries are highly sensitive to inflation expectations, and with inflation gauges still above the Fed’s target of 2%, we believe this tight correlation will likely persist for a while,” said Jonathan Liang, Standard Chartered’s CIO of fixed income and FX.
The tight relationship between oil and Treasurys could add further upward pressure on yields if crude prices remain elevated, as higher energy costs feed into inflation expectations, experts told CNBC.
The one-month rolling correlation between front-month West Texas Intermediate crude and the 10-year Treasury yield has climbed to 0.96, according to BMO Capital Markets.
Prices have since rebounded as Iran and U.S. restarted attacks and oil inventories declined. Diesel gasoline, used by trucks and other key transport for the economy, recently topped $6 a gallon, further flaring inflation concerns.
“Speaking simplistically, higher oil prices lead to higher inflation expectations and vice versa,” said Steve Sosnick, chief strategist at Interactive Brokers.
“Normally, the relationship isn’t as clean as it is now, but the geopolitical drivers behind the price of oil and global inflation are so prominent that the normally modest correlation has become much tighter,” he told CNBC. “As long as oil prices remain firm and continue to drift higher, this will add pressure to interest rates.”
To be sure, National Economic Council Director Kevin Hassett told CNBC on Tuesday that he believes inflation is showing signs of cooling.
“If you look at the sort of near-term memory and the stochastic process that drives inflation, then you can see that things are slowing down,” he said during a “Squawk Box” interview. “That would be the argument that one would make if you were going to dissent tomorrow. But again, we respect the decision that the Fed makes.”
