US 10-year Treasury yield tops 5.3%, highest in 24 years

Q2 GDP revised sharply higher to 2.2%

Personal consumption upgraded to 3.8% growth

Long-term yields rise despite easing inflation

Bond supply and AI investment add to rate pressure

The yield on the 10-year US Treasury note surged past 5.3% during trading Wednesday, reaching its highest level in 24 years. The move followed a sharp upward revision to second-quarter economic growth that confirmed the US economy is holding up more strongly than expected despite elevated interest rates. Although inflation data came in below forecasts, a surge in government bond issuance and strong capital demand tied to AI infrastructure investment are pushing long-term yields higher.

According to Tradeweb, the 10-year Treasury yield climbed as high as 5.304% during trading Wednesday (local time). That surpassed the intraday high of 5.303% set in 2007 and marked the highest level since May 2002 — roughly 24 years ago.

The move extended a broader selloff in long-dated debt: the 30-year Treasury yield had already soared to 5.621% intraday Wednesday, its highest since June 2002, before the benchmark 10-year note broke through the 5.3% threshold.

The catalyst for the yield surge was stronger-than-expected US economic data. The Commerce Department revised its final estimate of second-quarter GDP growth to an annualized rate of 2.2%, up 0.7 percentage points from the previously reported 1.5%. Markets had expected the earlier figure to hold.

The personal consumption growth rate — which accounts for more than two-thirds of the US economy — was also revised upward, from 3.4% to 3.8%. Corporate investment in AI data centers, computing infrastructure and related facilities also supported growth.

By contrast, inflation data released the same day came in below market expectations. The personal consumption expenditures (PCE) price index for August rose 3.4% from a year earlier, falling short of the 3.7% consensus forecast. The core PCE index, which strips out food and energy, also rose less than expected, at 3.0%.

On its own, the softer inflation reading would normally be good news for the bond market: lower inflationary pressure reduces the need for the Federal Reserve to raise its benchmark interest rate further. Market expectations for an additional rate hike at the Fed's October FOMC meeting eased somewhat after the data.

Even so, the 10-year yield pushed past 5.3%. Market attention is shifting beyond the immediate question of whether the Fed will raise rates again, toward how long the US economy can sustain high borrowing costs.

The simultaneous upward revisions to second-quarter growth and consumption suggest that demand in the US economy is not easily cooling at current interest rate levels. The lower the risk of recession, the less urgency the Fed has to cut rates quickly. Markets are once again pricing in the possibility of a prolonged "higher for longer" rate environment.

The Fed's monetary policy is not the only force driving long-term yields higher. The US government's massive fiscal deficit and the resulting expansion of Treasury issuance are creating a structural supply burden in the bond market. Absorbing the flood of new government bonds requires offering investors higher yields.

The AI investment race is adding a new source of capital demand on top of that. As big tech companies and their suppliers pour enormous sums into AI infrastructure — data centers, semiconductors and power grids — their need to raise funds through the corporate bond market is also growing.

The Wall Street Journal noted that even if oil prices were to fall sharply, rising government debt levels worldwide and record-scale AI infrastructure investment could keep bond yields elevated for an extended period.

With the US government and corporations simultaneously drawing vast sums from the bond market, competition for investor capital is intensifying. As Treasury supply grows and corporate bond issuance rises in tandem, investors are likely to demand higher yields — adding further upward pressure on long-term rates.

sjy@heraldcorp.com