The 10-year Treasury yield crossed 5% for the first time in 16 years, propelled by expectations the Federal Reserve will maintain elevated interest rates and that the government will further boost bond sales to cover widening deficits.
The yield rose as much as 11 basis points to 5.02%, the highest since 2007.
Fed Chair Jerome Powell suggested last week that central bankers are inclined to hold rates steady at their November meeting, but remain open to hiking again if a resilient economy fans inflation risks.
Meanwhile, bond investors are being asked to buy increasing quantities of Treasury notes and bonds. The U.S. budget deficit has grown, in part because of rising interest costs.
At the same time, the Fed isn't replacing all of the Treasuries on its balance sheet as they mature. Dealers estimate that the outstanding debt will increase by $1.5 trillion to $2 trillion in 2024, vs about $1 trillion this year.
"Yields are rising because we are finally seeing supply come in," Tom Tzitzouris, head of fixed income research at Strategas Research Partners said on Bloomberg Television Monday. Fed rate increases and balance-sheet reduction "is catching up with the bond market now."
The U.S. Treasury increased the size of its quarterly bond sales for the first time in 2 1/2 years in August, and Secretary Janet Yellen's department is now readying its November financing plans.
Yields haven't been this high since the era that preceded the Fed's experiment with unconventional policies — near-zero benchmark rates and quantitative easing — aimed at shoring up an economy that had been rocked by the sub-prime mortgage crisis and collapse of Lehman Brothers.
Those policies were implemented on and off for 15 years until the pandemic, and the wave of government spending it triggered, fueled an inflation surge that forced policy makers to raise interest rates closer to the norm seen for decades.
The Treasury market is the world's biggest bond market, and Treasury yields are considered risk-free rates of return for the purposes of comparison with other investment opportunities.
The rise in yields translates into higher borrowing costs for households, businesses and governments in the U.S. and abroad. Stocks retreated worldwide Monday.
No 'Year of the Bond'
The rise in yields has humbled the giants of the financial world, some of whom predicted that 2023 would prove to be the "year of the bond."
The 10-year yield began this year at around 3.90%, and most Wall Street firms expected that it would decline as the Fed rate increases that began in March 2022 took their toll on the economy and brought inflation to heel. Among major dealers, Goldman Sachs had the most bearish forecast, calling for a year-end level of 4.3%.
