The 10-year Treasury yield touched 5.36% Wednesday, its highest since April 2002. It closed at 5.28%, but the pullback didn't hold.
This morning it's back at 5.34%. Every mortgage, corporate bond and stock valuation is now priced against a 24-year high in the benchmark rate.
Small Caps Took The Rate Hit
The S&P 500 slipped 0.22% to 7,801.77, a small step back from Tuesday's record. The Russell 2000 fell 1.31% to 2,793.20, roughly six times the S&P's loss.
Smaller companies borrow more at floating rates, so a gap like that is what you'd expect when yields rise. The pattern is carrying into today: Russell futures are down 0.9% and S&P futures 0.4%.
The Fed Minutes Matched The Bond Market
Minutes from the September meeting showed most officials think another hike "would likely be appropriate by year end." The Fed raised rates a quarter point on Sept. 16, to 3.75% to 4%.
Traders now see about a 71% chance of a December hike. The 2-year yield is at 4.82%, up 37.5 basis points in a month, so the front end has room to keep rising if the data comes in hot.
Oil Is The Bigger Story This Morning
WTI settled Wednesday at $88.96, up 0.77%, with Brent near $100. The larger move came overnight: Brent is up about 4% to around $104.
The jump came after reports that the White House asked for strike options against Iran, and as Storm Isaias shut in about a quarter of Gulf of Mexico output. Energy prices were up 16.3% from a year earlier in August CPI, so every move higher in crude adds to the inflation case the minutes laid out.
Gold Is Not Following Oil
Gold futures fell 0.22% to $4,131.40, a muted reaction for an asset that usually gains on geopolitical risk. The 10-year TIPS yield has risen from 1.90% to 2.94% this year, per Forbes, and that raises the cost of holding a metal that pays no interest.
The dollar index is up 0.2% to 102.40 this morning, per Newsquawk, after Fed Governor Waller said more hikes will likely be needed. As long as real yields and the dollar keep rising together, gold has two forces holding it back.
The Day Ahead
Initial jobless claims come out at 8:30 a.m. ET, with economists expecting 200,000 against 197,000 last week. A low number would back the hawkish minutes while yields already sit at 2002 levels.
PepsiCo reports before the open. St. Louis Fed President Musalem speaks at 10:40 a.m., and Kashkari is also scheduled to speak.
The 30-year bond auction at 1 p.m. is the day's main test. Last month's sale cleared at 5.308%, and the bond now trades near 5.70%, so today shows how much demand there is at that higher yield.
