Global bonds closed out their worst month in years on Wednesday, with the benchmark 10-year US Treasury yield posting its biggest monthly increase since 2022 and touching 5.307% intraday, a level last seen in June 2007. The S&P 500 registered a decline for September and European shares suffered their first monthly fall in six, according to Reuters.
The 10-year yield rose 53 basis points over the month. Thirty-year yields climbed about 39 basis points, their largest monthly increase since December 2024. The 30-year ended Wednesday’s session at 5.642%, close to its highest level since April 2002, after the 10-year briefly crossed 5.3% at its session high.
Cool inflation, hot bond market
The irony of the session was that the inflation data was good. The Fed’s preferred gauge showed headline PCE rising 3.4% year over year in August against expectations of 3.7%, with core PCE at 3.0% versus 3.3% forecast. Equities rose and two-year yields initially fell as traders cut the odds of an October hike.
Then yields turned back up. Analysts pointed to strong growth data as the driver. Q3 GDP was revised up to 2.2% from 1.5%, and the Atlanta Fed’s Q3 growth estimate remains hot. “You’ve got a fairly hot Q3 Atlanta Fed GDP expectation and we got a hotter Q2 GDP expectation, and so that’s probably pushing out longer-term real rate expectations,” said Rob Haworth, senior investment strategy director at U.S. Bank Asset Management Group, per CNBC.
“The inflation fire is not burning as hot as markets expected in August, and bond yields are adjusting their sails as investors rethink exactly how many Fed rate hikes might be needed to keep inflation moving back down to target.”
The assessment came from Christopher Rupkey, chief economist at FWDBONDS, who characterized the moment as recalibration rather than victory over inflation. Markets are not abandoning the idea of further tightening, he argued, only adjusting its timing.
Why yields surged
Three forces combined this month. Soaring energy costs from the US-Iran conflict and the disruption in the Strait of Hormuz fed inflation fears, with Brent crude trading above $100 a barrel for much of the period and diesel prices at records. The AI investment boom is boosting economic growth, which raises the risk of persistent price pressure. And investors are positioning for a period where interest rates stay higher for longer.
Weak demand at Treasury auctions added fuel. A sale of five-year notes drew thin bidding, pushing that yield above 5% for the first time since 2007. The 10-year’s 15-basis-point jump in a single session earlier in the week was its biggest one-day increase since the market turmoil that followed the April 2025 tariff announcement.
The oil backdrop kept getting worse before it got better. US diesel reached $6.53 a gallon, more than 70% above prewar levels, and the White House has weighed an export ban despite warnings it could backfire. Washington also offered the last 40 million barrels from the Strategic Petroleum Reserve, leaving little buffer if the conflict escalates further.
Equities end the quarter mixed
On Wednesday itself, the Dow Jones Industrial Average fell 443.87 points, or 0.86%, to 50,906.05. The S&P 500 lost 19.30 points, or 0.25%, to 7,651.54. The Nasdaq Composite bucked the trend, adding 63.52 points, or 0.24%, to 26,861.06, and finished September up 1.9%. The Dow and S&P 500 fell 4.3% and 0.5% for the month, with the Dow snapping a five-month winning streak.
The damage spread beyond the US. Government bonds in Japan, Australia and New Zealand fell as the Treasury selloff crossed borders. Indian equities slumped to three-month lows, with the Nifty 50 down 1.65% and the Sensex dropping 1,219.95 points as higher yields, crude prices and a stronger dollar weighed on sentiment. The dollar held near its strongest level since late July.
Volatility spiked in the final 15 minutes of trading as month-end and quarter-end rebalancing demand hit both bonds and equities at once, widening intraday swings in the indexes.
The Fed’s next move
The central bank raised its target range to 3.75% to 4.00% on September 16, its first hike since 2023. Wednesday’s data cut the market-implied odds of another increase at the late-October meeting to roughly 35% to 37%, down from about 71% a week earlier, with the next hike pushed to December, per the CME FedWatch tool.
Goldman Sachs now expects the Fed to hike once more in December and then stop. Chief economist Jan Hatzius wrote that the bank sees a strong chance the FOMC concludes additional hikes are unnecessary. Even so, traders still price three or four increases over the next 12 months, and “it’s still 75% odds of three hikes by the time we get to the middle of next year,” Haworth noted.
Adam Hetts, global head of multi-asset at Janus Henderson, summed up the consensus view: the inflation data is better than expected, but strong labor and GDP numbers suggest it is unlikely to derail expectations for another hike before the end of the year.
What to watch next
The September jobs report arrives Friday and will set the tone for the October meeting. A soft print would reinforce the December view and could finally take pressure off bonds. A hot one risks reviving the October scenario and pushing yields through levels not seen in two decades.
The OECD added a longer-horizon warning on Wednesday, saying AI-led investment is helping the global economy hold up marginally better than expected this year, but the energy shock is becoming more entrenched and will weigh on the outlook for 2027.
For now, the market’s problem is not inflation, which is cooling. It is growth and energy, which are not. Bonds are pricing that distinction, and the repricing has been brutal.