US Treasury yields hit highest since 2007; four Fed officials signal possible rate hike

On Thursday (September 24), U.S. Treasury yields rose across the board, with both the 10-year and 30-year yields hitting their highest levels since 2007. Analysts at Bank of America noted that long-term bond yields have "recovered" to pre-global financial crisis levels.

Fed Officials Strike Hawkish Tone

Four senior Federal Reserve officials delivered hawkish remarks within the past 24 hours:

• Patrick Harker, President of the Philadelphia Fed, stated that the Fed may need to raise interest rates again to lower inflation.
• John Williams, President of the New York Fed, said the U.S. economy has shown "remarkable resilience," but the Fed still has significant work to do in addressing price pressures.
• Beth Hammack, President of the Cleveland Fed, argued that inflationary pressures remain elevated, and the longer they persist, the more difficult it becomes to bring inflation back to target.
• Thomas Barkin, President of the Richmond Fed, pointed out that broad and persistent cost pressures increase the risk of inflation becoming entrenched.

Bond Yields Surge

U.S. Treasury bonds experienced another broad sell-off overnight:

• 2-year yield: up 2.49 bps to 4.914%
• 3-year yield: up 2.94 bps to 4.998%
• 5-year yield: up 5.8 bps to 5.054%
• 10-year yield: up 8.36 bps to 5.196%
• 30-year yield: up 8.49 bps to 5.482%

Historical Context and Fiscal Concerns

Bank of America analysts highlighted that the government's net interest expense (debt servicing costs) is at a historic high and is expected to reach 3.3% of GDP by the second quarter of 2026.

• In 2007, when the 10-year yield was around 5%, interest expenses accounted for only 1.7% of GDP.
• In 1991, when the 10-year yield peaked at around 7%, interest expenses were approximately 3.2% of GDP.

History suggests that Washington may only take fiscal discipline seriously after a further significant rise in bond yields.

Impact on Global Equities

A continued rise in U.S. Treasury yields would pose significant pressure on stock markets. According to a model by Jackson, Head of Global Asset Allocation Research at Invesco:

• If the 12-month average of the 10-year yield rises to 4.72% and continues upward, global stock markets could turn negative.
• The current 12-month average is approximately 4.34%, still below the model's threshold.
• Jackson has already moderately reduced equity exposure in favor of government bonds, warning that if yields keep climbing, the risk of pressure on equities over the next 12 months cannot be ignored.

Geopolitical Developments Offer Some Relief

Positive developments regarding Iran helped offset the upward pressure on Treasury yields. Multiple sources revealed that U.S. and Iranian negotiators are meeting in New York to explore a phased path to ending the conflict. Key elements include:

• Iran reopening the Strait of Hormuz
• The U.S. lifting economic sanctions on Iran
• Iran potentially regaining access to some frozen assets

The reopening of the Strait of Hormuz could serve as a critical bargaining chip in the negotiations.

Ongoing Volatility Risks

The prospect of further rate hikes continues to weigh on markets. Based on LPL Financial's analysis of six rate-hiking cycles since 1994, the S&P 500 has posted a median decline of 2.6% in the three months following the first rate hike.

Lori Calvasina, Head of U.S. Equity Strategy at RBC Capital Markets, noted that in the past five cycles, the index has fallen between 8% and 14% from its peak. She cautioned: "The start of a new phase keeps us alert, and we need to watch for a typical 5% to 10% pullback in the S&P 500 in the near term."

However, historical data also shows that markets tend to recover relatively quickly. LPL data indicates that the S&P 500 has posted a median gain of 6.8% one year after the first rate hike. Jeffrey Buchbinder, Chief Equity Strategist at LPL Financial, said that historically, markets are indeed nervous early in a rate-hiking cycle but tend to stabilize and return to focusing on economic and corporate earnings fundamentals.

A Milder Cycle Compared to 2022

Market analysts note that the current rate-hiking cycle is expected to be relatively short and mild, in stark contrast to the 525-basis-point aggressive tightening in 2022, which sent the S&P 500 into a bear market with a 25% decline. Sam Stovall, Chief Investment Strategist at CFRA, remarked that it was the sheer magnitude of the 2022 rate hikes that frightened the market.

In comparison, futures markets currently price the peak of this cycle at around 4.8%, with total rate hikes of only about 100 basis points. Mona Mahajan, Head of Investment Strategy at Edward Jones, believes the current rate trajectory feels like a moderate mid-cycle adjustment that can still be absorbed given the state of the economy and labor market.

Source: Securities Times China (券商中国)