The yield on 10-year Treasuries crossed above five percent on Monday morning, the first time it has breached that threshold since 2023.
The sell-off in Treasuries this year has sent yields climbing from a range of 4.15 to 4.30 percent in January, continuing the bond roller-coaster that has seen yields bouncing up and down for the past few years. Treasury yields rise as the price of bonds falls.
On Monday, the 10-year yield climbed from Friday’s close of 4.938 percent to as high as 5.012 percent. By midday, however, it retreated to as low as 4.936 percent and then bounced to 4.955 percent. If the yield were to close above five percent, this would be the first time since July 2007.
The yield on two-year Treasuries initially spiked higher on Monday morning, rising to 4.679 percent from Friday’s close of 4.664 percent. By midday, it had retreated to 4.622 percent.
The 10-year yield fell below four percent in 2024 as fears of a slumping labor market and an economic slowdown took hold in the final spring and summer of the Biden administration. The Fed cut its short-term benchmark interest rate target by half of a percentage point in September of 2024 and followed up with two more quarter-point cuts in November and December in an effort to stave off a downturn.
The Fed targets an overnight lending rate, called the federal funds rate, in the market for bank reserves. Under its ample-reserves framework, it steers that rate primarily through administered interest rates, particularly the interest it pays banks on reserve balances.
When the Fed started cutting the short-term fed funds rate and the interest on reserves rate in September of 2024, longer-term rates moved up in anticipation that the economy would avoid a slump. Following the election of Donald Trump in November of 2024, yields continued climbing as investors became more optimistic about the economy. Bond yields tend to climb when investors anticipate stronger economic growth and more favorable returns in riskier assets such as stocks and corporate bonds. On January 13, 2025, the 10-year hit 4.79 percent.
The 10-year subsequently declined , approaching four percent at times in the first half of 2025 before rebounding. When the Fed began to cut interest rates in the second half of 2025, the 10-year yield initially fell below four percent and then turned higher, ending December at 4.18 percent.
Yields fell in February of this year as tensions with Iran heated up, hitting 3.97 on February 27. As the closure of the Strait of Hormuz raised gas prices and consumer prices, and an AI-linked investment boom took off, yields began climbing again. Fed officials began warning that higher headline inflation ran the risk of higher inflation expectations, turning an oil-driven increase in official price indexes into stronger inflationary pressure across the economy.
In recent weeks, the market has become convinced that the Fed will raise interest rates this year. The CME Group’s FedWatch tool calculates 90 percent odds of a Fed hike at the meeting later this week, based on the prices of fed funds futures. The odds of a second increase in October or December are now about even. The chances that the Fed’s benchmark remains unchanged by the end of the year are now seen as negligible.
The 10-year yield is closely watched as a benchmark for borrowing costs for consumers and businesses, including U.S. mortgage rates. Higher long-term rates tend to weigh on stocks because they raise the discount rate investors apply to future earnings and can act as a brake on economic growth.
While some analysts point to inflation concerns pushing up rates, market-based measures of inflation expectations and longer-term consumer expectations have not increased significantly. The 10-year breakeven rate, which is the difference between the nominal yield on a regular Treasury bond and the yield on the U.S. government inflation-protected bonds, was 2.36 percent on Friday, matching its February high, when the 10-year yield was around 4.3 percent.
The more important driver appears to be expectations for robust corporate debt issuance, much of it tied to artificial intelligence, and anticipation of economic growth accelerating. The notion that government deficits are driving yields higher is belied by the fact that deficit projections have moved up only slightly since yields were below four percent.
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