The dollar posted its strongest gain since June after 10-year Treasury yields rose above 5%

The spot dollar index rose 0.6% at its peak on Monday, September 14: this was the U.S. currency’s strongest one-day gain since June 17, according to Bloomberg. This occurred amid a spike in the yield on 10-year Treasury bonds, which briefly rose above 5%: at its peak, it reached 5.017%, the highest level since July 2007, MarketWatch reported, citing data from Dow Jones Market Data.

According to Bloomberg, 10-year Treasuries rose above 5% for the first time since 2023. “This is a psychologically important level,” noted Bridge Hurana, a fixed-income portfolio manager at Wellington (as quoted by MarketWatch). Later on Monday, yields fell back below that level.

The yield on 2-year Treasury bonds—which are most sensitive to the Fed’s short-term policy—approached 4.69%, but then began to decline by more than 2 basis points. It remains, however, well above the Federal Reserve’s target of 3.75%, MarketWatch noted. Last week, 2-year Treasuries hit their highest level since July 2024.

Yields that rise due to robust economic growth have very different implications for stocks and the economy as a whole than those driven by a resurgence of inflation, rising government debt, or tensions in the government bond market itself, CNBC notes. Higher yields are not necessarily a “bearish” signal if they are accompanied by healthy economic growth, CNBC notes.

The rise in yields on September 14 is partly due to an imbalance between supply and demand, as massive borrowing by the U.S. Treasury and corporations competes for investors’ capital, said Jason Ware, chief investment officer at Albion Financial Group, in an interview with CNBC. Wear pointed to the economy’s resilience and stable core inflation, arguing that stocks would be more vulnerable to a slowdown in consumer spending or investment in artificial intelligence than to the 10-year Treasury yields. Therefore, he does not expect a market crash simply because 10-year yields rise above 5%.

However, the 5% rate could become a problem for stocks if investors demand higher compensation for inflationary and fiscal risks, the TV channel notes. A massive federal budget deficit—recently estimated at nearly $2 trillion—along with heavy borrowing and persistent inflation, has led to a rise in the term premium, the TV channel reports.

The sharp rise in crude oil prices has created yet another potential source of inflationary pressure. Oil prices rose after Saudi Arabia shut down a key pipeline that bypasses the Strait of Hormuz.

According to the CME Group's FedWatch tool, the probability that the Fed will raise interest rates by a quarter of a percentage point currently stands at 90%.

“A rate hike [by the Fed] would seem like a logical step, based on the data and market expectations. I believe investors have already priced this in, and prices could rise following such a decision. No change could trigger a negative reaction, as it would once again show that the regulator is lagging behind events,” said Jay Woods, chief market strategist at Freedom Capital Markets.

If the U.S. central bank decides not to raise interest rates at its meeting on Wednesday, the Fed risks losing control over yields on long-term 10-year and 30-year bonds, as happened in the U.K. in 2022, noted Hurana of Wellington. He supports a “preemptive” rate hike, as the bond market is behaving extremely nervously.

Yields on government bonds are rising as consumer price index data released on Friday, September 11, slightly exceeded expectations and remained well above the Fed's 2% target, as has been the case for the past five years.

This report was the last indicator the regulator reviewed before its monetary policy meeting on September 15–16, according to CNBC.

This article was AI-translated and verified by a human editor