US benchmark yield at its highest since 2002 amid rising oil prices

US Treasuries rebounded from the global bond selloff that raced through European markets on Thursday, pulling 10-year yields back from a 24-year high.  

The bounceback gained steam after a softer-than-expected manufacturing report pointed to some cooling in segments of the US economy, driving traders to dial back bets on how steeply the Federal Reserve will raise interest rates over the next several months. But analysts also pointed to other factors, like the unwinding of crowded positions and worries about building strains in credit markets and parts of Europe that triggered a flight into the haven of US Treasuries. 

 That shift caused another volatile about-face in the Treasury market, where 10-year yields had surged to the highest level since 2002 earlier in the session. But by mid-day in New York, the market had swung sharply the other way, with the two-year yield down 11 basis points at 4.78%. The 10-year yield was down about 5 basis points on the day at 5.24% after earlier climbing as high as 5.34%. 

 

 "Today is very much not about US fundamentals and US data," said Izaac Brook, US rates strategist at RBC Capital Markets. "Everybody is looking at overseas yields and saying, 'You need to move into safety, buy Treasuries.'"

 The moves marked a respite from the downturn that has been racing through markets for weeks as the oil-price shock of the US-Iran war ripples through the global economy, pushing investors to bet central banks will further raise interest rates. Massive government borrowing, resilient growth and artificial-intelligence investments that are flooding the market with new debt have contributed to the downturn. 

 The persistent rise in yields has been driving up government interest bills, hitting investors with losses and threatening to exert a new drag on global growth by rippling down to the cost of business and consumer loans. In Washington, the Trump administration has tried slow the selloff by stepping up its buybacks of longer-dated bonds, only to see rates continue to climb. 

Global government bonds just posted their worst quarter since 2024, according to a Bloomberg index. The slump on Thursday sent the yield on UK 30-year bonds to 6% for the first time since 1998. Some analysts and investors say US long-dated bonds could also reach that level. 

 The rebound in the US gained ground after the Institute for Supply Management's gauge of manufacturing activity fell 0.1 point to 54.5, below the median estimate in a Bloomberg survey of economists. 

 As yields dropped to fresh session lows, match dollar swap spreads plunged at a rapid pace, signaling an unwinding of crowded positions put on over the past couple of weeks. That likely supported Treasuries, along with flight-to-quality spillovers from the ongoing selloff across France and Italian sovereign debt, which continues to drastically underperform bunds and Treasuries.

 

What Bloomberg Strategists say...

"Treasuries might look cheap against stocks, GDP and the global cycle, but on their own historical terms they have more to fall before they become oversold and ready for a durable bounce."

-Simon White, Macro Strategist, Markets Live. For the full analysis, click here.

 Investors will seek clues on the US economy's health and the Federal Reserve's next steps from Friday's payroll numbers, which are forecast to have grown by around 88,000 in September, according to a Bloomberg poll of analysts, nearly half the prior month's rise. 

But bond traders are convinced that the Fed is going to continue raising rates to pull down inflation that's been stuck over the central bank's 2% target since 2021. Swaps are pricing in at least three more quarter-point rate hikes through next September.