Why is United States 10-Year Treasury yield climbing today?

The U.S. 10-Year Treasury yield surged 1.4% on Tuesday, reaching a near two-decade high of 5.030%. This marked a significant jump as financial markets anticipated a quarter-point rate increase at the Federal Reserve's meeting, signaling the first hike since July 2023. Inflation data had been particularly encouraging, with core CPI increasing by 0.3% month-over-month in August, surpassing expectations, and the headline figure climbing to 3.4% year-over-year, well above the Fed's 2% target.

This heightened inflation expectation had pushed the likelihood of a rate hike to over 85%, according to CME FedWatch data. The situation was further complicated by a sharp rise in global oil prices, with Brent crude surpassing $107 per barrel due to escalating Middle East supply risks and threats to key infrastructure. The potential for a higher interest rate, rather than a rate hold, could exacerbate the bond selloff by casting doubt on the Fed's commitment to price stability, thus maintaining upward pressure on long-duration yields.

The market impact is evident as risk assets like the S&P 500, Dow Jones, and NASDAQ have all fallen by 0.3%, 0.4%, and 0.4% respectively, as higher yields increase the discount rate applied to future corporate earnings and draw capital away from equities. The anticipation of the Fed's updated Summary of Economic Projections and dot plot on Wednesday, which will provide insights into the future rate path until at least March 2027, adds to the current volatility.

Overall, a combination of the FOMC meeting commencement, high expectations for a rate increase, energy-related inflation, and a global bond selloff has collectively driven the 10-year yield to its highest level since 2007, impacting mortgage markets, corporate borrowing costs, and equity valuations across the board.