10-Year Yield Hits 20-Month High as Hike Odds Jump to 64%

The bond market has repriced the Fed's path from cuts to hikes, and the 10-year yield breakout is spreading across the globe.

The 10-year Treasury yield broke above 4.76% Monday, its highest in nearly 20 months, as a hawkish Fed repricing and a rebound in oil prices flipped market bets from rate cuts to a September hike.

"The Fed is prepared to act if necessary," said Sean Simko, head of fixed income portfolio management at SEI Investments. "If the labor market remains stable and inflation stays elevated, the Fed could lean toward a rate hike at its September 16 meeting."

The policy-sensitive 2-year yield surged about 11.8 basis points Friday and climbed to around 4.35% Monday, while the 30-year yield rose roughly 5 basis points to about 5.26%. Brent crude briefly reclaimed $90 a barrel after the weekend US-Iran military escalation, up nearly 4% intraday, while WTI gained more than 4% to about $85.50.

Federal funds futures now price a 64% probability of a September hike, up from roughly 35% before Fed Chair Kevin Warsh's hawkish Jackson Hole speech Friday, according to Reuters. The repricing raises the cost of capital for the US government, corporations, and households, with the August jobs report Friday and CPI on September 11 set to decide whether the move holds.

Warsh's Jackson Hole speech was the central trigger. He emphasized that price stability is the Fed's core mandate and reaffirmed the 2% inflation target as "firm and fixed," refusing to rule out a September hike. The fed funds rate sits at 3.75%, and markets now price a hike scenario that Barclays and Société Générale economists have begun forecasting for September and December — scenarios previously excluded from their baseline outlooks. The July meeting already produced a dissenting vote in favor of a hike, and the last time the 10-year yield traded this high was January 2025.

The move has not been driven by policy alone. Rising energy prices have reignited global inflation risks, and the 10-year yield's breakout above 4.75% signals a further rise in financing costs for the US government, corporations, and households.

Long-End Pressures Extend Beyond the Fed

If the 2-year yield primarily reflects policy expectations, the sustained climb in 10-year and 30-year yields reveals deeper structural issues. The 30-year yield at about 5.26% remains below the multi-year high set in mid-August, after the Treasury Department expanded long-term bond buybacks to $4 billion a week on August 19 to improve liquidity in those securities. The move worked for hours before reversing.

US fiscal deficits and Treasury supply remain structural challenges, while investors demand higher term premiums to hold long-duration debt. Mark Spindel, chief investment officer at Potomac River Capital, said future bond supply deserves attention, including in the corporate market. September is historically a peak issuance season for US investment-grade corporate debt, and new supply could absorb market liquidity while the inflation outlook has not meaningfully improved.

Global Yields Rise in Tandem

The rise in US yields has spread across global bond markets. Germany's 10-year bund yield climbed to 3.313% Monday, its highest since 2011, while Japan's 2-year yield rose to its highest in 31 years and Germany's 2-year yield reached its highest since July 2024, according to The Wall Street Journal. This indicates global bond markets are not confronting a simple "Fed trade" — rising energy prices have suppressed rate-cut expectations across major economies, and fiscal expansion plus increased government bond supply is pushing long-term yields higher.

In equities, Asian stocks were broadly under pressure Monday. South Korea's KOSPI fell more than 3% intraday before pension fund buying narrowed the decline to roughly 0.1%, while the MSCI Asia-Pacific index fell 0.7%. Gold fell to around $4,437 an ounce, and bitcoin slipped to about $77,500.

Treasury Secretary Scott Bessent, speaking at a G20 gathering in North Carolina, boasted that the US bond market has outperformed the rest of the world since President Donald Trump's return to office — a defensive framing as the 10-year yield spiked. The comments came as US national debt crossed $40 trillion, with the federal deficit on pace for close to $1.9 trillion this fiscal year.

The next test is Friday's August employment report, followed by August CPI on September 11. If the labor market remains resilient and inflation shows no meaningful cooling, Warsh's hawkish signal could be validated, leaving room for September hike odds to climb further and Treasury yields to search for a new equilibrium. If the labor market deteriorates significantly, the market may question whether the Fed can hike as growth pressures mount. The answer determines whether a 10-year yield around 4.75% is a temporary adjustment or the new rate regime.

This article is for informational purposes only and does not constitute investment advice.