US interest rate rises to highest level since 2007

Yields on US Treasuries are soaring to their highest level in almost twenty years. The five-year yield has risen above 5% for the first time since 2007, driven by strong economic data, higher oil prices and disappointing demand at a major bond auction. The stock market is reacting negatively: the S&P 500 falls 0.8%.

In brief:

• The five-year yield rises above 5%, while the ten-year yield climbs to 5.13%.
• An auction of five-year Treasuries worth $70 billion goes poorly.
• Markets now fully price in three additional Fed rate hikes.

Yield rise hits Treasuries across the board

The bond market is under heavy pressure. According to Bloomberg, a combination of stronger than expected economic data, rising oil prices and weak auction results is pushing yields on US Treasuries sharply higher.

The five-year yield passes the 5% threshold, for the first time since 2007. The ten-year yield rises by almost 17 basis points to 5.13%, and the thirty-year yield reaches around 5.4%. Both levels are close to their highest readings since 2007.

$70 billion auction falls flat

An auction of five-year Treasuries worth $70 billion goes badly. The auction closes at a yield of 5,033%, more than 3 basis points above the expected level. It is the second weakest auction result in data going back to 2018, which indicates that investors are demanding ever higher compensation to buy US government paper.

The weak demand reinforces the sell-off already under way in the bond market and drives yields still higher.

Market prices in three additional Fed hikes

Interest rate swaps show that the market now fully anticipates three additional rate hikes of 25 basis points each from the US central bank over the coming year. A possible fourth increase is also being priced in.

The rising yields are also weighing on equities. The S&P 500 loses 0.8% on the day that the bond market shows the strongest selling pressure in years.