At 5.5%, treasury yield on US govt 30-year debt reaches fresh high since 2004

On the final day of a turbulent week, the yield on US government 30-year debt surged to a fresh multiyear high since 2004, reaching 5.53 percent. This marked a significant increase of five basis points, bringing it to 5.53 percent, and exceeding the 5 percent threshold observed as recently as early July. The 10-year note's yield also reached a new multiyear high, surpassing 5.22 percent.

US rates strategist Izaac Brook noted that there were no clear technical levels for investors to follow, leading to the volatility in yields. He suggested that this could allow yields to continue rising without any upper limit. Meanwhile, shorter-term debt yields, which are more sensitive to Federal Reserve interest-rate hikes, experienced a decline.

The 30-year yield was just above 5.50 percent on Friday afternoon in New York, showing an increase of three basis points from the previous day. In contrast, the two-year yield had decreased by about seven basis points. US economist Andrew Hollenhorst from Citigroup pointed out that there was no clear upper bound for further rate hikes, as the Fed's response to higher energy prices was still uncertain.

Despite the rise in long-term yields, short-term yields had already hit multiyear highs earlier in the week due to expectations of a September Federal Reserve rate increase, marking the first since 2023. This expectation was fueled by the ongoing war in the Middle East, which had driven up energy prices. Interestingly, Friday's increase in long-term yields contrasted with the drop in oil prices, which were typically a significant driver of daily changes in Treasury yields during such supply shocks.

Morgan Stanley's interest-rate strategists also raised their Treasury yield forecasts based on the firm's revised forecast for additional Federal Reserve tightening. They attributed most of the movement in 10-year yields to market pricing of the Fed's path. Rising Treasury yields were seen as a reflection of both the potential for higher energy prices to keep inflation elevated and indications that the US economy and companies were managing well with the higher interest rates.

The consumer sentiment gauge released by the University of Michigan on Friday, while falling to a four-month low in September, held up better than economists had anticipated. This positive sentiment contributed to the widening gap between short- and long-term yields, with key segments such as the two- to 10-year and five- to 30-year rebounding from their lowest levels in over a year.

Treasury futures activity suggested that traders were taking profits on their bets, such as the simultaneous buying of the five-year note and selling of Ultra Bond futures contracts.