U.S. government bond yields extended their advance on Thursday as investors responded to stronger business activity figures, developments in energy markets and expectations surrounding the Federal Reserve’s next policy decisions.
The 10-year Treasury yield climbed to 5.142%, reaching its highest level since July 2007 after recording its largest one-day increase since April 2025 in the previous session.
Longer-dated debt also came under pressure, with the 30-year Treasury yield rising to 5.443%, its highest level since 2004.
The two-year yield, which is sensitive to changes in monetary policy expectations, increased to 4.908%. That was its highest level since May 2024 and followed its largest daily rise since March 2026.
U.S. PMI Data Exceeds Expectations
Preliminary PMI figures showed U.S. business activity reaching its highest level in more than five years during September, with new orders among the factors supporting the increase.
The data prompted investors to reassess the potential path of inflation and interest rates.
Treasury supply was another factor affecting the market. A five-year note auction on Wednesday attracted lower demand, requiring primary dealers to take a larger proportion of the securities offered.
Energy markets were also being monitored after crude prices increased amid uncertainty surrounding the United States, Iran and shipping through the Strait of Hormuz.
Iranian President Masoud Pezeshkian said the country would “never surrender.” U.S. President Donald Trump had previously used a United Nations address to threaten to “annihilate” Iran if the conflict escalated.
Investors continued to assess what the diplomatic developments could mean for energy supplies and the timing of any reopening of the Strait of Hormuz.
“We expected the 10-year bond yield to remain in the 4.00%-5.00% range this year. We aren’t giving up on that range just yet; it mirrors the range during the five years before the Great Financial Crisis. Nevertheless, the risks now clearly point to more upside in yields,” Yardeni Research said.
Fed Comments Add to Rate Debate
Comments from Federal Reserve officials also contributed to the market’s reassessment of the interest rate outlook.
Fed Governor Michael Barr said further rate increases would probably be required to return inflation to the central bank’s target.
Chicago Fed President Austan Goolsbee discussed whether the effects of higher energy prices on inflation could prove persistent rather than temporary.
CME FedWatch data supplied with the source showed markets pricing a roughly 70% probability of a 25-basis-point increase at the Fed’s October meeting, up from approximately 50% before Wednesday’s PMI figures.
The probability reflects market pricing and can change as new economic information becomes available. It does not represent a confirmed Federal Reserve decision.
Treasury Conducts Long-Term Debt Buybacks
The increase in yields continued as the U.S. Treasury carried out further operations under its secondary-market debt buyback programme.
Up to $6 billion of 20-year and 30-year Treasury securities were due to be purchased during Thursday’s operations, marking the second long-term buyback operation of the month.
“A relief rally in bond prices would probably require a resolution of the war in the Middle East that would lower oil prices. Another possibility is that US Treasury Secretary Scott Bessent will act to bring bond yields down by buying back more Treasury bonds and issuing more Treasury bills,” Yardeni Research said.
The scenarios outlined by Yardeni Research represent the firm’s assessment and do not establish that either outcome will occur or that the Treasury will change its issuance or buyback policy.
Eurozone Yields Move Higher
Government bond yields also increased in the eurozone following business activity data from the region.
Germany’s benchmark 10-year Bund yield reached 3.549%, extending the previous day’s move, when it recorded its largest single-session increase in more than two months.
Germany’s two-year Schatz yield climbed to 3.303%, its highest level since September 2023.
Preliminary PMI figures indicated that eurozone business activity expanded at its fastest rate in more than three years.
The figures contributed to a reassessment of the European Central Bank interest rate outlook, including market expectations that policy could remain restrictive for longer or that further rate increases could be considered.
Future ECB policy will depend on subsequent economic data and decisions by policymakers, and market expectations do not constitute confirmed policy actions.