Treasury trouble

Just when AI doomsday warnings were giving investors enough to worry about in equities, the bond market decided to pile on.

The 10-year Treasury yield briefly hit 5.04% this morning, while the 30-year yield climbed to around 5.4%, putting both at their highest levels since 2007.

A perfect storm

Oil prices have been rising as conflict in the Middle East threatens global supply. Those higher energy prices can filter into everything from gasoline and travel to diesel and manufacturing, stoking fears that inflation could stay elevated after an already-hot August CPI report.

That combo has investors betting that the Fed will fight back with higher interest rates. The central bank began its two-day meeting today, and traders are pricing in a 94.5% chance of a rate hike tomorrow, according to CME’s FedWatch tool. For bond investors, expectations of higher rates make older Treasury bonds—which pay lower yields—less attractive. The prices of those bonds fall, pushing their yields higher.

Then there’s the longer-term problem: Everyone wants to borrow. The national debt has surpassed $40 trillion, while hyperscalers are issuing huge amounts of debt to finance the AI buildout. More debt competing for buyers can force borrowers to offer higher yields to get investors interested.

On top of that, some of the bond market’s traditionally steady buyers are stepping back. Pension funds have sharply reduced the share of their portfolios held in fixed income, leaving fewer buy-and-hold buyers to absorb the growing supply of government debt.

Markets meet their match

Wall Street is increasingly worried that rising Treasury yields could spiral out of control. A Bank of America survey of 170 fund managers this month found that 33% now consider a “disorderly rise” in bond yields to be the market’s biggest tail risk, up from 27% in August, and overtaking an AI bubble as their top concern.

For investors, though, higher yields come with a silver lining. Existing bondholders have taken losses as prices fell, but new buyers can lock in some of the highest yields in nearly two decades. And that extra income gives bond portfolios more of a cushion against further price declines, while offering investors a return that can actually outpace inflation. That also creates tougher competition for stocks: Why take a risk with equities when Uncle Sam is offering a hefty 5%?

So, what’s bad news for the markets could be good news for investors with fresh cash. And if the bond selloff gets worse, Treasury Secretary Bessent can always try another buyback.—SY