Diplomatic maneuvering over the Iran conflict, a long-awaited summit between President Trump and Chinese President Xi Jinping, and continued volatility in energy markets all drew a lot of media attention this week but the biggest market event was Wednesday's bond rout. The benchmark 10-year Treasury yield surged more than 20 basis points by mid-week, breaching 5.20% for the first time since the financial crisis in one of the worst single sessions for Treasuries in recent memory.
Three catalysts converged this week to put pressure on bonds. 1. Oil prices rebounded sharply on aggressive Iranian rhetoric. 2. September PMI data came in well ahead of expectations, with the composite index at 58.4 vs. a 55.3 consensus estimate, the highest reading since July 2021. 3. Fed Governor Michael Barr turned notably hawkish, saying "further policy adjustments are likely to be needed" to bring inflation to target. The phrase "adjustments", plural, carried weight as it signaled not a one-time move but a sustained tightening cycle.
A soft 5-year Treasury auction, the eleventh consecutive disappointing result, extended the pressure. The 10-year yield closed above 5.20%, the 30-year reached a 22-year high just above 5.46%, and Japan's 10-year yield hit a 30-year high as Tokyo markets returned from holiday. The MOVE index, which measures expected volatility in Treasury markets much like the VIX does for equities, surged from 76 to 105 in little more than a week, reaching levels last seen around the April 2025 Liberation Day episode. Futures markets are now pricing nearly four additional rate hikes over the coming year. That is a remarkable swing from the cuts being priced in as recently as late February. Markets steadied somewhat on Friday after New York Fed President John Williams and Philadelphia Fed President Anna Paulson offered more measured commentary, emphasizing that policy remains data-dependent and has not been set on autopilot.
Next week's calendar is dense with data that will directly inform the Fed's next move. August job openings are due Tuesday, the PCE price index, the Fed's preferred inflation gauge, arrives Wednesday, and September payrolls close out the week on Friday. With markets now pricing a meaningful probability of another rate hike as soon as October, each release will be closely watched for any sign that the economy is responding to tighter financial conditions, or that energy-driven inflation is beginning to feed into wages and broader prices.
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Andrea F. Pringle
Senior Vice President
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