US 10-Year Treasury Rate Hits 5% amid Fed Policy Outlook

With anticipation of a policy outcome by the Federal Reserve, the US bond market felt pressure again as the key 10-year treasury yield went up to hit 5%, which is not seen since October 2023. The yield increased by two basis points on the back of the higher price of crude oil and worries about inflation. 

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It wasn't only the 10-year yield that saw the increase. Yields increased across various maturities with expectations of the rise in interest rates in the United States amid the Federal Reserve's decision on September 15-16. 

Treasury Yields Rise Across Maturities 

The 2-year Treasury yield, which tends to respond more closely to expectations around short-term interest rates, climbed more than two basis points to 4.666%. It had touched its highest level since July 2024 in the previous week. 

At the longer end, the 30-year Treasury yield added two basis points to reach 5.374%. 

The rise has unfolded even as the US Treasury Department expanded its bond buyback operations. Those measures were intended to support the functioning of the Treasury market, but concerns surrounding inflation and the country’s rising debt levels have remained in focus. 

Rising Oil Prices Create More Headwinds 

Adding yet another pressure on inflation is rising oil prices. Prices for Brent crude gained 4% to trade at $108.65 per barrel, up significantly from around $72 that was seen prior to the onset of the war in Iran in late February. West Texas Intermediate crude gained 3.75% to $103.75 per barrel. 

There have been worries about oil supply amid increasing tensions in the Middle East region. Forces aligned with Iran reportedly captured Perim Island in the Bab el-Mandeb Strait following their capture of the port city of Mokha in Yemen’s western coast. 

According to the report, there were increased threats to Saudi Arabia as a result of increasing attacks by Houthis. According to reports, drones from Iraq reportedly damaged the East-West pipeline and the Saudi government shut down the crude oil route as a preemptive measure. 

Inflation is now facing another challenge from rising energy prices as the Federal Reserve prepares its next course of action on interest rates. 

Markets Price in High Probability of Fed Rate Hike 

Recent US inflation readings, along with the surge in crude oil, have strengthened expectations that the Federal Reserve could raise rates at its September meeting. 

Traders were pricing in roughly a 90% probability of a quarter-percentage-point increase at the September 15-16 meeting, according to the report. 

That expectation has kept pressure on Treasury prices and pushed yields higher across the curve. With the 10-year yield now at 5%, the US bond market enters the Federal Reserve’s policy decision with borrowing costs at levels last seen nearly three years ago.