US Treasury yields have surged to multi-year highs, with the 10-year yield rising 4.88 basis points to 5.23% after touching 5.2741% earlier in the day, according to Reuters. The 30-year yield climbed 5.36 basis points to 5.5556%, after hitting 5.5829% during the session. The 2-year Treasury yield rose 4.99 basis points to 4.914% compared with its session peak of 4.9555%. Earlier in the day, yields on 30-year Treasury bonds had hit their highest levels since mid-May 2004, while 10-year Treasury yields touched their highest since mid-June 2007 before paring gains. As per ETMarkets Smart Talk, the 10-year US Treasury yield had risen approximately 100 basis points from its February lows ahead of the Fed meeting, representing a much greater challenge for global equities than a well-telegraphed 25 basis point Fed hike.
The dollar remained stable near a two-month peak while traders closely monitored upcoming US economic reports, with the dollar index a touch higher at 101.2 and on track for a 1.8% advance this month, its best performance since June. The euro traded near its weakest level in three months at $1.1367 after the European Central Bank's chief signalled measured steps to quell inflation, while sterling was steady at $1.3248, also not far from a three-month trough. The dollar's strength comes despite volatile oil prices and rapid Treasury yield climbs, though gains were limited as traders awaited US data this week for clues on the Federal Reserve's rate path. As per Commonwealth Bank of Australia's Joseph Capurso, "We're more likely to get stronger US economic data which shows that the US economy is exceptional, and I think that's going to help to push up US interest rates compared to elsewhere, and help push up the US dollar."
Middle East tensions have emerged as a key driver of recent yield movements, with US President Donald Trump rejecting a peace proposal from Iran to reopen the Strait of Hormuz and end fighting in the Middle East. However, relief came as an official briefed on the negotiations told Reuters that Qatari mediators were likely to hold separate talks with Iranian Foreign Minister Abbas Araqchi in New York and with the US side on Monday or Tuesday in a fresh push to end the war. After rising more than 4% earlier in the day, US crude oil futures were barely higher in afternoon trading as renewed hopes for Middle East negotiations provided some relief for investors. As per LPL Financial's Lawrence Gillum, "Oil prices are up again after the Middle East ceasefire offer was rejected by Trump. There's likely going to continue to be upward pressure on bond yields as long as the Iran conflict uncertainty is out there." Brent crude futures approached $106 per barrel as markets doubted that renewed efforts to end the Iran war would get anywhere after Trump's rejection of Tehran's ceasefire proposal.
Market expectations for Federal Reserve policy have shifted significantly, with traders increasing bets that the Federal Reserve will raise interest rates by another 25 basis points in October to a 70% probability from 57% a week ago, according to CME Group's FedWatch tool. The 10-year Treasury yield is on track for its fifth straight day of gains, reflecting sustained upward pressure. Fed Governor Lisa Cook added to the hawkish sentiment, stating she expects continued inflationary pressure in coming months stemming from AI-related demand and higher oil prices, though she stopped short of saying more interest rate hikes will be needed. US data releases later in the week, including the PCE price index on Wednesday and nonfarm payrolls on Friday, are both expected to support the case for further Fed rate hikes. Despite the current optimism, LPL Financial's Gillum expects inflation to slow in the next year and that "some of the pricing is too aggressive," suggesting traders may be pricing in as many as four more hikes over the next year.
The municipal bond market is experiencing unprecedented disruptions as benchmark 30-year municipal debt yields climbed to 5.18% as of 2 p.m. New York time on Monday, marking the highest levels since at least January 2011 and up roughly 60 basis points this month, according to Bloomberg. About $2.3 billion in municipal deals were showing as moving to day-to-day status, with approximately $1.5 billion appearing to be sales to refund old debt to save on debt-service costs, as estimated by NewSquare Capital. Major deals have been delayed, including a $1.8 billion bond sale for the Los Angeles Convention Center that was originally expected to price this week but has been put on day-to-day status, and a roughly $777 million bond sale from the Convention Center Authority of the Metropolitan Government of Nashville and Davidson County that was originally supposed to price on September 24. The roughly $4 trillion municipal bond market, previously seen as a staid corner of fixed-income, is now getting more accustomed to intraday swings as issuers adopt more strategic timing approaches.
