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There’s more behind the rise in Treasury yields

2026-09-11

Kris Tomasovic Nelson, CFA

Head of Global Sustainable Investing

Economic insights Market insights

Transcript

Hi, I'm Chris Nelson, senior portfolio manager and head of sustainable investing at Russell Investments. This is Market Week in Review. This week the market story is really about interest rates. That narrative is being driven by four things. Last Friday's jobs report, the continued rise in Treasury yields, what we're seeing from central banks outside the US, and the CPI report from Friday the 11th. Taken together, investors are asking whether inflation levels are stable enough to keep rates where they are, or could it lead central banks to push them higher? Let's start by summing up the market moves of the trailing week. Equity markets have generally moved lower with higher oil prices and rising yields creating a tougher backdrop. Higher yields are particularly problematic for long duration equities, those that are earning their valuation, their cash flows further out in the future. But the clearest move this week was in bonds. The 10-year Treasury yield traded as high as 4.92% on Thursday. That's its highest intraday level since October of 2023. Oil also moved sharply higher. Brent crude futures moved above $107 a barrel on renewed fighting in the in the Gulf. Of course, average US gasoline prices rose in tandem with that, and elevated energy energy costs are adding to inflation pressure across Europe and parts of Asia, as well. But let's go back now to last Friday's jobs report, because those numbers were a meaningful to the backdrop of the yield moves and the economy this week. It was generally seen as a positive report. Non-farm payrolls came in well above expectations, while unemployment held at 4.1%. It's a pretty good number. Wage growth eased slightly to 3.1% year-over-year from 3.2%, also steady. So, the labor market looks resilient without sending a particularly troubling wage inflation signal. This in itself would lend support to holding rates steady and a nice growth outlook. But the bond market is telling us investors are not yet comfortable with the broader outlook. What the 10-year is telling us as it climbed above 4.9 is that the move is much more than just expectations for the Fed. This rise also reflects a higher term premium as investors demand more compensation for the uncertainty around inflation, fiscal policy, and bond market issuance. Oil of course reinforces the concern because even if core inflation behaves, Brent above $100 raises the possibility that headline inflation remains elevated for longer. So, thinking again about that CPI number, even a relatively benign inflation report may not support or send the long-term yields lower. A reminder that this is not just about the US story. We're seeing some of the same pressure outside the US. The European Central Bank raised rates by 25 basis points on Thursday, its second increase this year, and markets are also pricing further Bank of Japan tightening on higher energy and import costs. You can see the common thread. Central banks are balancing still resilient activity against inflation that has not fully settled. Okay, so that brings us to the CPI. Since we are recording before the August CPI report is released, by the time you see this the number is likely out. But we can and should talk about how to interpret the result because it is one of the most important remaining inputs before the FOMC meets on September 15th and 16th. Markets have moved fairly aggressively toward a hike with futures pricing roughly a 70% probability of an increase next week. That rose a little bit after the release of the PPI numbers on Thursday. Our strategists think that may be too hawkish, uh but the CPI result will be critical to the view. So, talking about the numbers, the potential scenarios, a core CPI reading of 0. 2% month-over-month or lower would reinforce the case for the Fed to stand pat. On the other hand, a reading of 0.3% or above would make the argument for the strike higher. Meanwhile, consensus expects the headline CPI, inclusive of food and energy, to rise 0.4% in August. So, there's already some expectation that the headline number will be higher. So, we could get a hot headline, but a softer core. And we think that would focus attention on the energy shock, rather than the broad re-acceleration in underlying inflation. That could be relatively reassuring for Fed policy, but still leave the bond market uneasy based on the uncertainty that I described earlier. So, recapping, the story this week started with a resilient labor market. We moved through higher oil and higher bond yields, and this contributed to equity market weakness, and then we ended with the inflation data. All of this is a prelude to next week's FOMC rate decision. We'll come back to you on that. Thanks for watching. We'll see you again. >> Hi, I'm Sophie Antelme head of portfolio and business consulting at Russell Investments. If you liked what you just saw and heard, consider subscribing to our YouTube channel or check us out on LinkedIn. Thanks for tuning in.

Key takeaways

Resilient U.S. jobs data supports the case for keeping rates steady
Higher oil prices and inflation uncertainty are pushing bond yields higher
Global central banks face increasingly difficult policy trade-offs

Rising yields put pressure on markets

Our Senior Portfolio Manager and Head of Global Sustainable Investing Kris Nelson sees interest rates as the defining market story this week, with resilient employment, higher oil prices and persistent inflation uncertainty all shaping the outlook.

Equity markets generally moved lower as rising yields and energy prices created a more challenging backdrop. Higher yields can be particularly difficult for long-duration equities, where a greater share of expected cash flows sits further into the future.

The clearest move, however, came from bonds. The 10-year U.S. Treasury yield traded as high as 4.92% on Thursday, its highest intraday level since October 2023.

Energy added another source of pressure. Brent crude moved above $107 per barrel amid renewed fighting in the Gulf, while U.S. gasoline prices also increased. Higher energy costs are adding to inflation pressures beyond the U.S., including in Europe and parts of Asia.

There’s more behind the move in Treasury yields

Last week’s U.S. employment report provided an encouraging signal about the underlying economy. Nonfarm payrolls exceeded expectations, while unemployment held at 4.1%. Wage growth moderated slightly to 3.1% year over year from 3.2%.

As Nelson explains, that combination points to a labor market that remains resilient without generating an especially concerning wage inflation signal. On its own, the report supports a healthy growth outlook while strengthening the case for keeping interest rates steady.

But there is more behind the rise in long-term yields than expectations for the Federal Reserve. The move above 4.9% also reflects a higher term premium, as investors demand additional compensation for uncertainty around inflation, fiscal policy and government bond issuance.

Oil reinforces those concerns. Even if underlying inflation continues to moderate, crude prices above $100 per barrel increase the risk that headline inflation remains elevated for longer. That means even relatively benign inflation data may not be enough on its own to push longer-term Treasury yields meaningfully lower.

Central banks confront a common challenge

The pressure on rates is not confined to the U.S. The European Central Bank raised rates by 25 basis points this week, marking its second increase of the year. Markets are also anticipating further tightening from the Bank of Japan as higher energy and import costs add to inflation pressures.

The common thread is that central banks are balancing relatively resilient economic activity against inflation that has yet to fully settle.

For investors, those regional differences also matter. The timing and extent of further tightening could vary significantly across economies as policymakers respond to their own mix of growth and inflation pressures.

Inflation remains key to the Fed outlook

At the end of the week, attention turned to the August Consumer Price Index (CPI) report, one of the most important remaining inputs before the Federal Reserve’s September 15-16 meeting. Headline CPI rose 0.4% in August and 3.4% year over year, reflecting in part the impact of higher energy prices. Core CPI rose roughly 0.3% month over month, slightly above consensus expectations, while holding steady at 2.4% year over year.

Ahead of the report, Nelson viewed a core CPI reading of 0.2% month over month or lower as strengthening the case for the Fed to remain on hold, while a reading of 0.3% or higher would make the argument for another increase more compelling. Markets responded accordingly. Futures had been pricing roughly a 70% probability of a rate increase on Thursday, but following Friday’s CPI report, those odds jumped to nearly 90%.

Taken together, the results leave the Fed with a mixed inflation picture. Higher energy prices are contributing to headline inflation, while the core reading adds to the case for further tightening. At the same time, core inflation remains steady on a year-over-year basis. Uncertainty around energy, fiscal policy and bond supply could also keep longer-term yields elevated.

For investors, the bigger story is about more than the Fed’s next decision. Resilient growth, energy prices, inflation and the compensation investors demand for holding longer-term bonds are all shaping the rates outlook.

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