The yield on the 10-year U.S. Treasury note pushed past 5.30% on Thursday, its highest level since May 2002, as a selloff in government bonds that began earlier this week accelerated on both sides of the Atlantic.
The move capped a 24-year high for the benchmark yield, which serves as a reference point for mortgage rates, corporate borrowing costs and much of the rest of the credit market. Financial shares slipped as the higher rates squeezed the outlook for lenders, even as other sectors of the stock market were little changed. Traders pointed to a mix of persistent inflation readings, growing concern over the scale of federal borrowing, and economic data that has stayed stronger than expected — the U.S. economy grew at a 2.2% annualized pace in the second quarter — as reasons the bond market is demanding higher compensation to hold long-dated government debt.
Pressure from the White House
The bond rout landed the same week President Donald Trump renewed his demand that Federal Reserve Governor Jerome Powell be forced out of his seat on the Fed's Board of Governors, after an inspector general's report cleared Powell of any criminal wrongdoing or illegal conduct over a $2.4 billion renovation of the central bank's Eccles Building headquarters. The watchdog's review did flag project-management failures but found no evidence Powell personally broke the law.
Powell's four-year term as Fed chair already expired in May, and control of the gavel has since passed to a successor, but Powell holds a separate seat on the Board of Governors that runs until January 2028 and can be ended only through resignation or removal for cause — a higher legal bar than simply losing the chairmanship. Trump has pushed for Powell's exit from the Fed in one form or another for years, largely over frustration that the central bank has not cut interest rates as fast as he would like.
Rising long-term yields work against that goal in practice: even if the Fed lowers its short-term policy rate, mortgage and corporate borrowing costs are set largely by yields further out on the curve, which markets — not the Fed chair — control day to day. Thursday's selloff suggested investors are more focused on inflation and the growing stock of government debt than on who occupies any single seat at the Fed.
Economists caution that if yields keep climbing, the government's own interest bill will grow, adding further pressure to the federal budget just as lawmakers continue to debate spending levels. Markets will get a fresh read on the trajectory of both inflation and the deficit in the coming weeks, with investors watching closely for any sign the rate move extends further or spreads into corporate credit markets.
