US Treasury yields hit 2007 high as shares retreat on PMI

Treasury yields hit 5.054% and US shares fell after September business activity rose to 58.4, lifting expectations for a Fed hike.

PMI jump resets rates

S&P Global said its flash US Composite PMI Output Index, which covers manufacturing and services, climbed to 58.4 in September from 56.0 in August. The reading was the strongest since July 2021, adding a growth signal to a market already focused on inflation above the Federal Reserve's 2% annual goal.

The 10-year Treasury yield rose 8.7 basis points to 5.054%, its highest since 2007. The 2-year yield, more sensitive to near-term Fed policy, added 8.49 basis points to 4.862%, a level not seen since June 2024; as yields rise, Treasury prices fall.

Fed funds futures placed the October hike probability at yüzde 73, up from yüzde 53 earlier, according to market pricing cited in the data. Fed Governor Michael Barr said Wednesday the central bank had taken an important step last week to "recalibrate" short-term borrowing costs, and he indicated more hikes would likely be needed.

Adam Button, chief currency analyst at investingLive, said "Services continue to lead but manufacturing output picked up sharply, with factory hiring rising at the fastest pace since February 2021." The manufacturing detail mattered because it suggested the strength was not confined to consumer-facing services.

Equities weaken across regions

Stocks moved lower following the yield rise, with the S&P 500 down 0.53% on the day, the Dow Jones Industrial Average off 0.18%, and the Nasdaq Composite down 1.05%. Higher discount rates often weigh more heavily on growth shares whose valuations lean on earnings expected further in the future.

Outside the US, the pan-European STOXX 600 slid 0.27%, while an MSCI index of global shares fell 0.51% after four consecutive days of gains. The cross-market pattern put the focus back on whether resilient activity data would keep policy rates elevated for longer.

Oil trades on Iran diplomacy

Oil prices rose after earlier declines this week tied to rising Gulf supplies and hopes for talks to halt the Middle East conflict. US crude gained 1.49% to $91.87 a barrel, while Brent rose 2.39% on the day to $101.62.

President Trump was due to meet Chinese President Xi Jinping in Washington, with trade, technology and Tehran expected to feature in the discussions. Trump said his envoys had held productive talks through mediators for Iran, while Iranian President Masoud Pezeshkian said Iran would not surrender but believed diplomacy could help end the conflict.

Cole Smead, CEO and portfolio manager at Smead Capital Management, said "We've been through a series of starts and stops like this." He added that a momentum-driven market made investors reluctant to trade against fast-moving headlines.

Dollar strength hits gold

The dollar gained as rate expectations moved higher. The euro fell 0.5% to $1.1389, its weakest level since July 29, while the dollar rose 0.56% against the yen to 158.25.

Traders were alert to possible Japanese intervention if the dollar approached 160.00 yen, a level closely watched in currency markets. Spot gold fell 1.55% to $4,287.05 an ounce as higher yields and a firmer dollar increased the relative cost of holding non-yielding bullion.

The next market path turns on two tests: whether September's PMI strength carries into October and whether oil remains near current levels. If activity data stays firm, global borrowing costs may stay elevated, US equity multiples could face more pressure, and banks, insurers and money-market funds would continue to operate in a higher-yield environment.

If the data softens, the Fed path could ease, lowering pressure on stocks and the dollar. If Iran diplomacy reduces conflict risk, oil importers would get relief through lower energy costs; if talks fail and supply worries intensify, crude prices could feed inflation expectations and increase volatility across energy shares.