U.S. Treasury Yields Surge on Inflation Pressures; Odds of September Fed Rate Hike Top 70%

10-year yield tops 4.9%, nears 5%

30-year yield hits 5.35%, sets fresh high

PPI beats estimates as oil rises

ECB rate hike adds to pressure

"August CPI to drive rate decision"

Long-term U.S. Treasury yields are surging as investors confront inflation risks from rising crude prices, the European Central Bank's rate increase and U.S. producer prices that came in above market expectations. Interest-rate futures now imply a 71.8% chance that the Federal Reserve will raise rates on September 16. Markets are also watching the August consumer price index, due on September 11, as a decisive factor in the Fed's rate decision.

According to Bloomberg, the 30-year U.S. Treasury yield reached 5.35% on September 10, the highest since June 2007, when it stood at 5.44%. The benchmark 10-year yield also climbed above 4.9%, its highest level since October 2023, bringing it closer to 5%.

BMO Capital said expectations are resurfacing that the 10-year Treasury yield will return to the 5.0% level. A temporary move above 5% would not be much of a surprise, it added.

The immediate catalyst for the rise in long-dated yields was the August producer price index released by the U.S. Labor Department that day. PPI rose 5.4% from a year earlier, slightly above the market consensus of 5.3%. The July increase was 4.8%.

Inflation concerns tied to higher oil prices also added momentum to the rise in bond yields. On the New York Mercantile Exchange, October West Texas Intermediate futures traded up 4.19% from the previous settlement at $100.07 a barrel. On ICE Futures Europe in London, November Brent crude futures stood at $105.03 a barrel on September 11. The gains came amid escalating tensions between the U.S. and Iran and growing concern that Houthi rebels could block the Bab el-Mandeb Strait.

The ECB's rate hike, along with its signal that further increases remain possible, added another source of upward pressure on U.S. Treasury yields. U.S. President Donald Trump's pledge to give Americans $5,000 if Republicans win the midterm elections also stoked concern over a wider fiscal deficit and higher inflation.

CME FedWatch data show the market is pricing in a 71.8% chance of a Fed rate hike in September. That is more than 10 percentage points higher than a day earlier.

The August CPI, a key variable in the Fed's rate decision, will be released on the morning of September 11. The index measures changes in prices paid by consumers for goods and services. Markets are particularly focused on how much core CPI, which excludes food and energy, increased.

Hwang Jeong-su, New York correspondent, Korea Economic Daily, hjs@hankyung.com