10-Year Treasury Yield Posts Biggest Quarterly Jump Since 1994

The 10-year Treasury yield locked in its biggest quarterly increase since the first quarter of 1994 on Wednesday, capping what could be the worst quarter for U.S. government bonds in a generation by one measure. The benchmark yield settled at 5.292%, its highest level since May 14, 2002, according to Dow Jones Market Data.

The quarter's surge surpassed the jump recorded in the third quarter of 2022, when aggressive Federal Reserve rate hikes to fight surging inflation inflicted painful losses across the bond market. Yields on longer-dated Treasurys have recently traded at their highest levels in decades. The 30-year bond yield rose Wednesday to 5.638%, its highest settlement since June 7, 2002.

Several catalysts converged to drive the rout in the more than $30 trillion market for U.S. government debt: the ongoing war in Iran, signs of resurgent economic growth in the U.S. and abroad, and the immense sums being borrowed to finance the artificial-intelligence build-out. Investors also pointed to stubbornly high U.S. budget deficits and the unwind of the Japanese yen carry trade as contributing factors.

Even a softer-than-expected official inflation report on Wednesday failed to calm the market. Long-dated yields fell after the release, but the decline didn't hold.

The timing compounds the pressure. Earlier this month, the Federal Reserve raised its policy-rate target for the first time in three years, with more hikes expected, as the Treasury yield curve threatens to invert once again. The 10-year rate influences the cost of trillions of dollars in borrowing for consumers, companies and the U.S. government.

Not everyone sees runaway inflation ahead. Will Kinlaw, State Street's head of data intelligence and market research, said fears that a jump in diesel prices would fuel broader U.S. inflation may be overblown in the near term. The market seemed to be overestimating the chance of another Fed hike in October, he told MarketWatch, because the climb in diesel prices so far doesn't appear to be causing a spike in grocery prices this month, citing State Street data. State Street uses artificial intelligence to scrape consumer prices from online sources, providing more frequent inflation readings than government measurements.

The U.S. Bureau of Labor Statistics will release September consumer-price index data on Oct. 14. The previous reading showed inflation rose 3.4% in the 12 months through August — above the Fed's target but well below the 2022 peak of 9.1% in June of that year.

Rate expectations shifted during Wednesday's session. Traders in federal-funds futures priced in a 50.9% chance on Tuesday of another October hike from the current target range of 3.75% to 4%, according to the CME FedWatch Tool. By late Wednesday morning, they had dialed that back to 37.1%, after the personal consumption expenditures price index showed year-over-year inflation easing to 3.4% for August.

History offers perspective on the scale of the move. The biggest quarterly gain ever for the 10-year yield was a jump of more than 2 percentage points in the first three months of 1980, to around 12.6%, according to Dow Jones Market Data.

Meb Faber, co-founder and CIO of Cambria Investment Management, argued the rise in long-term yields is more a normalization of interest rates than a crisis, in sharp contrast to the low-rate era that followed the Fed's near-zero policy response to the 2008 financial crisis. The 10-year rate doesn't look especially elevated across many decades of history, he said in an interview, though the speed of this quarter's climb has been jolting.

The damage is broad. The Vanguard Total Bond Market ETF, which tracks the U.S. investment-grade fixed-income universe, was on track to lose 3.5% this quarter on a total-return basis, FactSet data showed at last check Wednesday. With more Fed hikes expected and the yield curve threatening to invert again, the pressure on bonds looks set to persist.