Earlier this month, the 10-year Treasury yield was trading just below 4.8%. By Friday it had jumped to 5.23%, its highest level since 2007.
That’s a big move for the benchmark that helps set mortgage rates. And the obvious explanation, sticky inflation, only covers part of it.
The easy answer is inflation
Start with what most investors expected. Inflation hasn’t cooled the way markets hoped, so traders are pricing in more tightening from the Federal Reserve.
Fed funds futures trading shows a 64% likelihood of a rate hike in October, according to the CME FedWatch tool. Consumers are nervous too. The University of Michigan’s consumer sentiment index showed year-ahead inflation expectations jumped to 4.6% in September, up from 4% in August. That’s the highest reading since June.
A quick refresher if you don’t follow bonds: yields and prices move in opposite directions. When yields climb this fast, bond prices are falling.
One strategist thinks supply matters more
Thierry Wizman, global FX and rates strategist at Macquarie Group, doesn’t think inflation is doing most of the work.
“I think this year it has more to do with the bond issuance than the inflation story,” Wizman said.
He said yields at these levels aren’t unusual in themselves, particularly because they’re not coming with extreme inflation expectations or an aggressively tightening Fed.
“We don’t have a Federal Reserve that’s tightening aggressively, so a lot of things look pretty normal. The thing that’s abnormal is that we’re in the midst of a very strong investment cycle,” he said.
Washington and Big Tech are both borrowing
Two big borrowers are hitting the market at once. The federal government is issuing debt to cover a large deficit. Companies are borrowing heavily to build artificial intelligence infrastructure.
Wizman said that combination has pushed bond supply up enough to put upward pressure on yields. Corporate AI debt now competes with Treasuries for the same investor dollars.
The numbers are hard to ignore. Vanguard estimates that Alphabet, Amazon, Meta Platforms, Microsoft and Oracle issued about $132 billion of debt through July. Between 2020 and 2024, those companies averaged roughly $35 billion a year.
And it goes beyond the five biggest names. Broader AI-related debt issuance could reach $300 billion to $570 billion this year as data center operators, chipmakers and utilities borrow to pay for the buildout.
Why stock investors should care
Higher yields don’t just hit homebuyers. They can drag on stocks by raising companies’ borrowing costs and by making bonds look better to investors who want income.
That creates an awkward loop. The AI spending that has powered so much market enthusiasm is also feeding the bond supply that pushes yields up and weighs on stocks.
Don’t expect relief soon
Wizman said the capital-spending plans of hyperscalers and their suppliers will likely keep bond issuance elevated through this year and into next year.
If you’ve been waiting for mortgage rates to drop before you buy, his conclusion won’t help: “So these yields could go higher,” he said.
