The yield on the five-year Treasury note climbed above 5% on Wednesday for the first time since 2007, as a burst of unexpectedly strong US business activity data forced traders to price in more Federal Reserve tightening barely a week after the central bank delivered its first rate hike since 2023.
The five-year yield rose 20 basis points to 5.03%, according to Bloomberg, eclipsing the 4.99% peak reached in 2023 during the Fed's previous tightening campaign. The move was part of a broad selloff across the curve: the 10-year yield reached 5.07% and the 30-year settled at 5.37%, both the highest since 2007. A five-year note auction Wednesday drew the highest yield since 2006.
A Survey That Caught Everyone Off Guard
The catalyst was S&P Global's flash purchasing managers' index for September, which blew past every forecast. The composite output index jumped to 58.4 from 56.0 in August — the strongest reading in more than five years. Services business activity surged to 58.7 against expectations of 56.0 and an August reading of 56.8. Manufacturing climbed to 57.0, versus a 53.6 consensus and 53.2 the prior month.
"US business continues to boom, with output growing at the fastest rate for over five years in September," said Chris Williamson, chief business economist at S&P Global Market Intelligence. "Historical comparisons suggest that the latest survey data point to annualized growth of around 5% with a 4% gain now signalled for the third quarter as a whole."
The report's internals were what unsettled the bond market. Backlogs of uncompleted work grew at the sharpest rate since May 2022, and firms added staff at the fastest pace since June 2022.
"While this accumulation of uncompleted orders bodes well for the further expansion of output and capacity in the coming months, it also indicates that companies are developing more pricing power, and hence is a worry for the inflation outlook," Williamson said.
He flagged energy costs as a specific pressure point: "Firms' input costs have meanwhile jumped in September at the steepest rate for four years, with fuel and transport costs spiking higher thanks to the rise in oil prices seen during the month, which will add further to the upward pressure on selling prices and inflation in the coming months."
Equities and Commodities
Stocks sold off as yields climbed. The Dow Jones Industrial Average closed at 51,512.42, down 351.27 points or 0.68%. The S&P 500 fell 0.75% to 7,706.39, while the Nasdaq Composite dropped 1.13% to 26,936.04. The small-cap Russell 2000, the most sensitive to borrowing costs, slid 1.67% to 2,841.79.
Williamson's cost warning was visible in the energy tape. West Texas Intermediate crude rose 2.20% to $92.51 a barrel and Brent traded near $98. Gold fell 1.22% to $4,322.80 an ounce as higher real yields weighed on the non-yielding metal.
The October Question
The Fed lifted its benchmark to 3.75%–4.00% last week, a move Chair Kevin Warsh characterized as removing a "dose of accommodation." Governor Michael Barr added to the hawkish tone Wednesday, saying "further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion."
Markets moved accordingly, though estimates for the October 27–28 meeting diverge sharply depending on the source. CNBC reported odds jumping to 73% based on CME FedWatch, while other trackers put the probability closer to 45%–62%. Investing.com noted futures now imply roughly four additional hikes over the next 12 months.
Sources: S&P Global Flash US PMI (September 2026 release), Yahoo Finance market coverage, Bloomberg, Investing.com, CNBC, FXStreet