A softer inflation print eased the front of the Treasury curve on the quarter's final day, while the long end pushed to levels not seen since 2002.
Wednesday delivered what bond bulls had been waiting for, and the long end of the Treasury market sold off regardless.
August inflation came in cooler than feared. The personal consumption expenditures price index rose 0.3% on the month and 3.4% from a year earlier, with the core measure up 0.2% and 3.0%. Traders responded by cutting the odds of an October rate increase to 38%, down from 51% on Tuesday and 71% a week earlier.
The 2-year note, the maturity most tied to the Fed's next few moves, did what that repricing implies. Its yield slipped one basis point to 4.88%, according to Treasury's daily par curve. Everything further out went the other way. The 5-year and 10-year each rose three basis points, to 5.09% and 5.29%. The 20-year added four, to 5.68%, and the 30-year added five, to 5.64%. The 10-year finished at its highest level since May 2002.
A quarter for the record books
The three-month picture is starker. On the 10-year stood at 4.44%. It ended September 85 basis points higher, the largest quarterly increase since 1994. The 2-year rose 74 basis points over the same stretch and the 30-year 73. The gap between 2-year and 10-year yields widened from 30 basis points at the end of June to 41 on Wednesday, 4 of those basis points in the final session alone.
Stocks absorbed the move poorly. The S&P 500 gave up an early gain to close down 0.3% at 7,651.54. The Dow fell 443.87 points, or 0.9%, to 50,906.05. Only the Nasdaq held positive, up 0.24%. The 10-year was near 5.30% in overnight trading.
Two ways to read the split
One reading says this is about term premium and supply. Investors are demanding more pay for holding long-dated debt amid heavy issuance and large deficits, and the selling in Japanese and European bonds this week fits a worldwide repricing of duration rather than a story about the Fed.
The other says the long end is pricing a sturdier economy. The same report showed real consumer spending up 0.6%, second-quarter growth was revised up to 2.2%, and Minneapolis Fed President Neel Kashkari said Wednesday evening that "inflation is still too high."
The 10-year inflation-protected yield sits near 2.93%, leaving a roughly 2.36-percentage-point gap to the nominal yield of 5.29%. That gap is a rough measure of inflation compensation, including risk and liquidity premiums. The high real yield is consistent with firm growth and tight policy, but it cannot by itself distinguish those forces from fiscal concerns or a higher premium for holding long-term debt.
What settles it
The cleanest test is Friday's September payrolls report, where economists expect about 90,000 new jobs. A strong number that lifts real yields further supports the growth case. A weak number that leaves long yields elevated would point back toward supply and term premium. Before then, Freddie Mac's weekly mortgage survey at noon Thursday becomes the first reading taken with the 10-year at a 24-year high; a daily lender survey already puts the 30-year fixed rate at 7.6%, the highest since November 2023.