Treasury yields surge to near 20-year high as oil jumps back above $102 per barrel

The yields on U.S. Treasury bonds jumped Wednesday and oil prices rose, sending stocks tumbling as investors braced for the prospect of future Fed rate hikes. The yield on the 10-year Treasury bond, which heavily influences consumer borrowing rates, especially mortgages, rose as high as 5.13%, its highest level since 2007. Yields on 5- and 30-year Treasury bonds also hit levels that had not seen since before the 2008 global financial crisis. Stocks fell in response to the rise in yields and oil prices. The Nasdaq Composite index tumbled 1.4% by midday, and the S&P 500 fell 0.9%. The Dow declined 350 points. International Brent crude oil climbed to more than $103 per barrel, while U.S. crude oil jumped above $92. Rising oil prices often translate into higher bond yields due to the effect that higher energy costs can have on inflation more broadly. Yields move higher One of the primary drivers of Wednesday’s rise in bond yields was the release of new economic data that revealed rising inflation. “US business activity growth accelerated for a fourth successive month in September to reach the fastest rate for over five years,” S&P Global reported in its latest purchasing managers index reading. “Firms’ input costs have meanwhile jumped in September at the steepest rate for four years, with fuel and transport costs spiking higher thanks to the rise in oil prices seen during the month, which will add further to the upward pressure on selling prices and inflation in the coming months,” said Chris Williamson, chief business economist at S&P Global Market Intelligence. Investors viewed the data as likely to increase the odds of multiple Federal Reserve interest rate hikes later this year and next. As of midday Wednesday, market odds for a Fed rate hike in October were up to more than 75%. Federal Reserve governor Michael Barr told a housing conference in Chicago that in his view, “Risks to achieving our inflation target have increased, while risks to the labor market have receded. Barr signaled that would likely vote in favor of another rate increase during the Fed’s Oct. 26-28 meeting. “In my base case, further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion,” he said. Oil prices rise Crude oil trading desks Wednesday were focused on the latest developments in the Iran war. A day earlier, the price of oil had fallen sharply after President Donald Trump said U.S. officials were holding talks with Iranian representatives at the U.N. General Assembly. But any hopes that the talks would produce tangible results were dashed by a new report Wednesday that a cargo vessel had been “stuck by an unknown projectile” in the Strait of Hormuz. Lying just off Iran’s southwestern coast, the critical chokepoint for global energy supplies has been under a military blockade for seven months. Trump further shook energy markets Tuesday when he said he supported a ban on U.S. exports of diesel fuel. “Let’s not send out the diesel,” Trump said to reporters at the U.N. “I’ve called for it within my people. I’ve been talking about it.” Trump’s remarks sent European benchmark diesel futures higher by as much 7% early Wednesday. But experts and energy industry groups warn that a ban on diesel exports would spell even higher gas prices for Americans. “Removing U.S. diesel from the market could instead result in reduced refinery runs, global economic damage and even higher U.S. prices,” the American Petroleum Institute said in a statement. Trump’s Energy Secretary Chris Wright also said a ban would not help to bring down prices. “ The blunt tool of banning diesel exports definitely doesn’t work,” he said Wednesday at an event in New York, according to Reuters. Stocks tumble Inflation sensitive stocks, such as travel companies and large technology firms, were the hardest hit by Wednesday’s reversal. The S&P’s biggest sector loser was utilities, which contains many of the companies leading the AI data center boom. Higher interest rates could potentially add billions of dollars to the cost of building AI infrastructure. The consumer discretionary and real estate sectors were also notable decliners. Highly sensitive to yields on 10-year Treasury bonds, the average 30-year fixed mortgage Wednesday carried an interest rate of 7.17%, according to Mortgage News Daily.