10-year note hits 19-year high with Fed decision eyed

U.S. Treasury yields soared on Tuesday, reaching their highest level since July 2007 as investors anticipated a potential first round of rate hikes from the Federal Reserve to combat inflation. Global bond markets witnessed a surge in yields, partly fueled by surging oil prices that have heightened expectations for central banks worldwide to increase interest rates.

The 10-year U.S. Treasury note's yield surged 4.7 basis points to 5.008%, marking its peak since July 19, 2007, and was on track for a sixth consecutive increase in seven sessions. The Bank of England was reportedly considering halting sales of long-dated government bonds to provide funds to the government. Oil prices rose approximately 2% amid supply concerns following attacks on Saudi Arabian energy infrastructure that left the East-West Pipeline offline, and Libya's potential declaration of force majeure after protests disrupted oil production.

Jim Barnes, director of fixed income at Bryn Mawr Trust, noted that inflation data, geopolitical events, and budget-related concerns worldwide have consistently pointed to rising yields with no signs of relief. The 30-year bond's yield climbed 4.5 basis points to 5.373%, its highest since June 13, 2007. Treasury auctions will release $13 billion in 20-year bonds later on Tuesday.

The Fed's rate hike expectations have risen steadily, with a 92.7% chance of at least a 25 basis point hike at the central bank's policy announcement on Wednesday, according to CME FedWatch, up from 59.4% a week ago and 33.1% a month ago. The yield curve gap between two- and 10-year Treasury notes, a key economic indicator, stood at a positive 34.5 basis points.

A rate hike decision could challenge new Fed Chair Kevin Warsh, who was selected by President Trump with the assumption he would cut rates. The two-year Treasury yield, a proxy for Fed rate expectations, rose 2.7 basis points to 4.661% after climbing to 4.688%, its highest since July 5, 2024, with markets now anticipating nearly 100 basis points of hikes in the next year.

Bank of America's U.S. economist Aditya Bhave expects 75 basis points in Fed increases this year, while Morgan Stanley's Chief U.S. Economist Michael Gapen anticipates two 25 basis point hikes in September and December. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) remained at 2.418%, unchanged from Monday, and the 10-year TIPS breakeven rate was at 2.377%, suggesting the market forecasts about 2.4% annual inflation over the next decade.