The 10-year US Treasury yield rose above 5% on Monday for the first time in nearly three years. The move came as energy prices fed by Middle East supply disruptions kept inflation pressure high, and as the Federal Reserve prepared to meet on September 15-16.
A hike is now the base case
Traders have raised the odds of a rate increase at this week's meeting sharply. Prediction market bettors put the chance near 80%, and Goldman Sachs chief economist David Mericle wrote that market pricing is close to 90%. Mericle said that level is high enough that the committee will likely want to avoid the market reaction that would follow from holding rates steady.
The Fed is meeting under Chair Kevin Warsh. The bond selloff has raised the stakes for his first major communication test, with investors weighing persistent inflation against tighter financial conditions. Strategist Ed Yardeni said a move this week would help restore the Fed's inflation-fighting credibility and might ease upward pressure on long-term yields.
Markets and the AI trade
Asian shares struggled as investors weighed Middle East tensions, elevated oil prices and higher bond yields. Wall Street also fell, with AI stocks among the drags, after industry figures called for a slower build-out of AI capacity.
The combination matters for households. Long-term yields set the floor for mortgage rates and corporate borrowing costs, and a fast jump in yields shows up in loan pricing within weeks.
What to watch
The Fed's statement and economic projections land on Wednesday, the second day of the meeting. Investors will also watch oil, since fuel costs are the main channel pushing headline inflation higher this quarter.