They got spooked: 2-year Treasury yield +13 basis points to 4.90%, after yesterday’s auction. 7-year +14 basis points to 5.04%. 30-year hits 5.39%.

By Wolf Richter for WOLF STREET.

Treasury yields in the 2-year to 10-year range spiked by 12 to 14 basis points this morning, with the 7-year yield going over 5% and the 10-year yield hitting 5.10% currently, after the S&P’s Flash PMI showed red-hot growth and underlying inflation pressures in services and manufacturing, while the announcement of another Treasury buyback auction tomorrow fell flat.

The 10-year Treasury yield spiked by 13 basis points this morning to 5.10%, the highest since June 2007, having therewith broken through the 5% ceiling it had gotten stuck on and bounced against for two weeks.

What exactly causes markets to suddenly get spooked like this is always a form of speculation, so here we go again. Today’s spook-moment came right after the release of the hot S&P US Composite Flash PMI that had underlying inflation pressures in services and manufacturing written all over it.

From the S&P PMI report:

“US business continues to boom, with output growing at the fastest rate for over five years in September. Historical comparisons suggest that the latest survey data point to annualized growth of around 5% with a 4% gain now signalled for the third quarter as a whole.

“To put the growth surge in context, barring the spike in demand following the opening up of the economy after the COVID-19 lockdowns, the latest improvement in business activity is the greatest recorded since early 2015. Business is clearly booming now in both manufacturing and services.

“However, this growth is being accompanied by some of the most severe supply chain bottlenecks seen in the near-two-decade survey history if the pandemic is excluded, with companies also reporting increasing problems finding suitable staff. Backlogs of work are consequently rising sharply. While this accumulation of uncompleted orders bodes well for the further expansion of output and capacity in the coming months, it also indicates that companies are developing more pricing power, and hence is a worry for the inflation outlook.

“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.”

Here is the long view of the 10-Year Treasury yield. At 5.09%, yields are not high in a historical context beyond the era of QE:

The Treasury buyback announcement this morning fell flat. Treasury said it would buy back up to $6 billion at face value of 20-year and 30-year bonds maturing between February 2047 and February 2056. The actual prices paid at market value will be less than $6 billion after the big haircuts for debt issued during the low-interest-rate years. The $6 billion cap at face value is the same as at the last buyback auction of this type held on September 11, after which yields spiked further, which was not the purpose. The purpose of these buyback auctions is to push down long-term Treasury yields.

The 30-year Treasury yield spiked by 9 basis points to 5.39% at the moment, the highest since July 2004, having edged past the 5.37% high on September 10, and past the 5.35% high in June 2007.

The 2-year Treasury yield spiked by 13 basis points this morning to 4.91%, the highest since May 2024, four months before the rate cuts had even started.

The Fed pays attention to the 2-year yield; it’s a strong signal for the Fed about its next policy moves, and the 2-year yield is telling the Fed to hike its policy rates pronto and multiple times.

Yesterday, at the 2-year Treasury auction, it took a yield of 4.787% to sell all $79 billion of 2-year notes, the highest auction yield in two years, now crushed in the secondary market. It’s quite something that the already highest-in-two-years auction yield is followed the next day by a 13-basis point spike in the secondary market. Some people are now kicking themselves for having bought too early.

The 7-year Treasury yield jumped by 14 basis points this morning, to 5.04% ahead of the 7-year note auction tomorrow. Now all yields of 7 years and longer are over 5%, with the yields in the 2-year to 5-year range closing in on it.

Update on the the 5-year Treasury yield, after today’s auction results were just released: At the 5-year note auction today, it took a yield of 5.033% to sell all $80 billion in notes, the highest auction yield since before 2006 (which is as far as I checked). In the secondary market, the yield then spiked further, now by 18 basis points  to 5.03%. Someone is getting spooked.

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