Five-year US Treasury yield tops 5% for first time since 2007

The yield on five-year US Treasury notes climbed above 5% on Wednesday, marking the highest level in nearly 20 years as robust economic data prompted investors to anticipate additional Federal Reserve rate increases aimed at controlling inflation.

The benchmark rate advanced 20 basis points to reach 5.03%, exceeding the previous peak of 4.99% recorded in 2023 during the Fed's prior tightening campaign.

Market expectations for further policy tightening grew on Wednesday following the release of S&P Global's September preliminary data showing US manufacturing and services activity exceeded median forecasts. The stronger-than-expected readings intensified pressure in the bond market, with a five-year note auction conducted by the US Treasury on Wednesday producing the highest auction yield since 2006.

Last week, Fed officials unanimously approved an interest rate increase for the first time since 2023, lifting the benchmark federal funds rate to a range of 3.75% to 4%. Chairman Kevin Warsh stated the move removed a "dose of accommodation." Market participants now project four additional rate hikes over the next 12 months.

Policymakers have expressed growing concern about inflation, which has remained above the Fed's 2% target for five and a half years. Some officials have cautioned about price pressures that appear to be enduring, particularly given the strength of the US labor market.