A key 'affordability' rate touched its highest level since 2007 on Monday
The U.S. dollar was getting a haven bid Monday as the yield on the 10-year Treasury note briefly topped 5%.
The benchmark 10-year Treasury yield found some support from dip buyers Monday after touching the crucial 5% threshold for the first time in nearly three years.
The week started with Wall Street on edge, with oil prices marching higher, jitters about artificial intelligence growing and investors looking elsewhere for safety.
Known as the "affordability" yield, the 10-year rate BX:TMUBMUSD10Y touched 5.011% Monday, hitting its highest intraday yield since July 19, 2007, when it reached 5.069%, according to Dow Jones Market Data. It edged back to 4.96% later in the session.
"My hunch is that was the cyclical high in yields we saw in 2023," said Will Compernolle, macroeconomic strategist at FHN Financial. "That also was the key technical level we were counting on for support, and dip buyers stepped in and rallied the market a little bit to bring yields lower."
The last time the 10-year Treasury yield breached 5% was in October of 2023, but its grip on that level proved fleeting, according to Dow Jones Market Data.
"It is a psychologically important level," said Brij Khurana, fixed-income portfolio manager at Wellington, adding that policymakers have been showing concern about the higher level of yields.
His view is that the Federal Reserve could risk losing control of 10-year and 30-year yields BX:TMUBMUSD30Y - which happened in the U.K. in 2022 - if U.S. central bankers opt not to raise interest rates at their meeting on Wednesday.
Khurana said he supports a "precautionary" hike, because the bond market has been behaving in a very nervous way.
The sharp summer selloff in the $31.5 trillion Treasury market has further increased borrowing costs for households, businesses, the AI companies known as hyperscalers and the U.S. government. The federal budget deficit was recently pegged at nearly $2 trillion.
The bond rout comes as inflation in the U.S. remains above 3%, well over the Fed's 2% yearly target. Oil prices jumped again Monday as the Iranian conflict intensified, briefly lifting global crude prices (BRN00) to nearly $109 a barrel before they too eased modestly.
Yemen's Houthis have seized more territory in the Middle East, and Saudi Arabia's crucial East-West pipeline has been attacked. That puts more strain on the workarounds for transporting of Middle Eastern oil out of the region without going through the Strait of Hormuz.
"What does this mean for bonds? It's definitely not good news," Thierry Wizman and Gareth Berry, strategists at Macquarie, wrote in a Monday client note. They pointed to rising oil prices as adding to the broader pressures in the global bond market from increased supply, both from the financing needs of artificial intelligence as well as high federal budget deficits. Bond prices move in the opposite direction of yields.
"You've got the impact of the Middle East conflict, and an ongoing situation that looks unlikely to resolve itself anytime soon," Kieran Osborne, chief investment officer at Mission Wealth, said on Monday.
Yet the labor market looks steady and the economy has been holding up, despite pressures from elevated oil prices and the Iran war, the tariff fight and other affordability issues.
"I think the economy is more resilient than a lot of people give it credit for," Osborne said. With that backdrop, he expects the Fed to hike rates only once this year and the economy to take the recent higher yields in stride.
The policy-sensitive 2-year Treasury yield BX:TMUBMUSD02Y also eased slightly to 4.62%, but that's still well above the 3.75% upper limit of the Fed's target policy range. That signals traders are bracing for at least one Fed rate hike by the end of this year.
Stocks SPX DJIA COMP were trimming their declines from earlier in Monday's session as yields steadied. It's notable that in 2023 when the 10-year yield briefly reached 5%, the S&P 500 was 1.2% lower in the following week, according to Dow Jones Market Data. But it was 8.1% higher in the following month and up 20.2% in the following six months.
Still, the Cboe Volatility Index VIX, known as Wall Street's "fear gauge," was climbing Monday, a signal of more potential volatility for the S&P 500 over roughly the next 30 days. This comes as the AI industry considers hitting pause due to safety concerns.
Meanwhile, traders were piling into cybersecurity stocks, helping the iShares Expanded Tech-Software Sector ETF IGV jump more than 5%, according to FactSet.
The dollar also was seeing some haven support. The ICE U.S. Dollar Index DXY was up 0.3%, climbing against a basket of rival currencies, something the greenback has struggled to do during the summer selloff in the Treasury market.
The Treasury Deparment didn't immediately respond to a request for comment.
-Joy Wiltermuth