The rise in long-term US borrowing costs is no longer solely a question of Federal Reserve policy. The yield on the benchmark 10-year US Treasury note reached 4.97% on Friday, as higher energy prices added to inflation pressure and concern persisted over the scale of federal borrowing.
Earlier in the session, the 10-year yield touched 4.992%, its highest level since October 2023. It has risen by a full percentage point since the end of February and now sits only slightly below its highest level since 2007.
The move follows an August inflation report that showed consumer prices accelerating. The consumer price index increased by a seasonally adjusted 0.4% in August, leaving the 12-month rise at 3.4%. Gasoline accounted for more than a third of the monthly increase.
Core CPI, which excludes some volatile items, rose 0.3% in August. That was 0.1 percentage point above economists' forecast. The data sharpened expectations that the Federal Reserve may keep monetary policy tighter for longer, or raise rates again.
Markets put the probability of a quarter percentage point increase at the Fed's policy meeting next week at about 86%, up from about 72% on Thursday. The central bank's key interest rate currently stands at 3.50% to 3.75%.
Energy costs have been a central part of the immediate inflation picture. The national average price of gasoline has reached $4.29 a gallon, while diesel has climbed above $6 a gallon. US oil prices rose above $100 a barrel on Thursday amid an escalation in the Middle East.
Higher Treasury yields are already feeding into borrowing costs elsewhere in the economy. The rate on a 30-year fixed-rate mortgage reached 7.08% on Friday, according to Mortgage News Daily. That was the highest level in more than a year.
Investors are also weighing longer-running pressures on the Treasury market. The US government is spending about $2 trillion a year more than it collects in taxes. Its cumulative debt is roughly 100% of a year's gross domestic product, while annual interest payments have already reached around $1 trillion.
Interest spending is on track to rise to $2 trillion over the next decade. Those figures leave the government needing to issue large amounts of debt while investors demand higher returns on longer-term securities.
Long-term bond yields have risen worldwide, reflecting high government borrowing and demand for capital for the artificial intelligence buildout. The combination has created wider competition for money across public borrowing and private investment.
Treasury Secretary Scott Bessent has intervened to try to smooth turbulent bond markets. The brief does not establish how much the latest rise in yields reflects expectations for further Fed action, fiscal concerns or the broader demand for capital.
Nor is the timing of any reversal clear. It will depend in part on the path of energy prices, the course of inflation and whether demand for Treasury debt absorbs the government's borrowing needs without requiring still higher yields.
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