The selloff has been fueled by stronger than expected economic data, oil holding above $100 a barrel and deteriorating demand for government debt. A $70 billion five-year note auction cleared at 5.033%, more than 3 basis points above the expected level and the second biggest tail on record, while a 7-year auction drew 5.085%, the highest rate ever recorded. A Treasury buyback operation of 20 to 30 year debt accepted just $4.08 billion of a $6 billion maximum. The MOVE index of Treasury volatility is heading for its biggest weekly jump in more than a year, up nearly 30%.
Markets now price roughly a 70% chance of a Fed rate hike in October, up from virtually zero at the start of September, and rate swaps fully price three additional 25 basis point hikes over the next year. The average 30-year fixed mortgage rate jumped to 7.45%, its highest since April 2024, and Kobeissi Letter expects it above 7.50%. Bianco Research says the market is demanding a hike on October 28, a week before the midterm elections, warning that long-term yields could spike further if the Fed sits idle. Economist Steve Hanke argues the bond vigilantes are riding high and that Treasury Secretary Scott Bessent "has lost his credibility and is blowing smoke."