U.S. Treasuries faced their sharpest sell-off in nearly 18 months on Wednesday, driven by a stronger-than-expected economy, rebounding international oil prices, and weak demand at a government bond auction. The yield on the 5-year Treasury note breached the 5% mark—a level not seen since 2007—while the 10-year yield hit its highest point since 2007. Markets are concerned that persistent economic strength and stubborn inflation may force the Federal Reserve to continue raising interest rates.
The sell-off began with a rise in oil prices. Iran’s president stated that the Strait of Hormuz would not be fully opened as long as sanctions remain in place; consequently, Brent crude prices climbed back above $103 per barrel during the session, fueling inflation fears. Subsequently, the preliminary U.S. Composite Purchasing Managers’ Index (PMI) for September showed business activity in both manufacturing and services expanding at the fastest pace in over five years, alongside the strongest job growth in more than four years, further driving up Treasury yields across the curve.
The Fed had just implemented its first rate hike in three years last week. On Wednesday, Governor Barr remarked that inflation remains above the 2% target and that further rate hikes might be necessary. Interest rate swap markets have now fully priced in expectations for three additional 25-basis-point hikes over the coming year and are beginning to hedge against the possibility of a fourth hike.
The sell-off intensified following a lackluster auction of $70 billion in 5-year Treasury notes. The high yield at the auction settled at 5.033%—more than 0.03 percentage points above pre-auction market expectations and the highest level since 2006. Dealers were left with a disproportionately large share of the issue, indicating insufficient interest from other buyers. The 5-year Treasury yield rose by as much as 0.2 percentage points in a single day, pushing past the 5% threshold.
The 10-year Treasury yield climbed to approximately 5.13% during the session before closing at 5.113%—marking the largest single-day increase since April 2025, when Trump announced the “Liberation Day” tariffs—while the 30-year yield rose to around 5.4%. Rising yields signal falling bond prices and will drive up borrowing costs for mortgages and corporate debt issuance. Even the U.S. Treasury’s announcement that it would repurchase up to $6 billion in 20- to 30-year government bonds on Thursday failed to halt the slide.
The sharp drop in U.S. Treasuries also dragged down the stock market; the S&P 500 fell 0.8%, the Nasdaq Composite dropped 1.1%, and the Dow Jones Industrial Average declined 0.7%. Investors face a dilemma: while government bond yields have risen, the economy remains robust; if inflation persists as a result, the Federal Reserve may be forced to push interest rates even higher.