U.S. Treasury Yields Hit Near Two-Decade Highs as Bond Auction Fails
U.S. Treasury yields surged to their highest levels in nearly two decades on Wednesday, driven by strong economic data, rising oil prices, and a weak five-year bond auction. The selloff pushed the S&P 500 down and increased market bets on further Federal Reserve rate hikes.
U.S. Treasury yields across most maturities reached their highest levels in almost two decades on Wednesday, marking a significant shift in the bond market. The decline in bond prices was initially sparked by higher oil prices and exacerbated by stronger-than-forecast U.S. manufacturing and services activity data.
A key factor in the selloff was a US$70 billion five-year Treasury auction that drew surprisingly dim demand. This result pushed the yield above 5% for the first time since 2007. The auction cleared at a yield of 5.033%, which was more than three basis points above the expected level and marked as the second-worst five-year auction since 2018.
The broader impact was felt across the curve. The benchmark 10-year Treasury yield rose almost 17 basis points to 5.13%, its highest level since 2007. Meanwhile, thirty-year Treasury yields traded at approximately 5.4%, the highest since 2007 and within 4 basis points of the highest level since 2004.
Market participants responded by increasing bets on further Federal Reserve policy tightening. Swaps fully reflected three quarter-point hikes over the next year, with significant hedging for a fourth increase. If these anticipated rate hikes are realized, the central bank's target rate would reach a range of 4.75% to 5%. This follows last week's decision by Federal Reserve officials to lift borrowing costs to a range of 3.75% to 4%, the first increase in three years.
The bond selloff negatively impacted equities, causing the S&P 500 Index to drop almost one percent during the session. Additionally, the Treasury Department's expanded buyback program faces higher stakes as long-term yields have climbed beyond the multiyear highs seen when the program was announced in mid-August.