Bond market catches its breath as August inflation data meets expectations

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The 10-year Treasury yield pulled back to 4.93% after touching nearly 5%, as consumer prices rose 3.4% in August, matching July's pace

Treasury Secretary Scott Bessent (Buddhika Weerashinghe/Bloomberg via Getty Images).

U.S. Treasury yields retreated Friday after August consumer price data came in line with expectations, offering a brief reprieve from a week-long global bond selloff that had pushed the 10-year yield within striking distance of 5%.

August's Consumer Price Index showed a 0.4% monthly gain and a 3.4% year-over-year increase, unchanged from the annual rate recorded in July. The 10-year Treasury yield fell 1 basis point to 4.93% after earlier touching 4.979%, its highest level since late 2023. U.S. stock indexes rose 1% or more following the release.

"The market is breathing a collective sigh of relief because consumer price index inflation today did not go above expectations or soar," Adam Sarhan, chief executive of 50 Park Investments, told Reuters. "The Fed is likely to stay data dependent and monitor the situation because higher energy prices and higher food prices act as an indirect tax on consumers and businesses."

The data did not eliminate concerns about a rate increase at the Fed's meeting next week. Market expectations still reflect a meaningful probability of a hike, even as some investors expect the central bank to hold and assess conditions.

Treasury Secretary Scott Bessent this week moved to shore up the long end of the bond market, directing his department to expand its repurchase program for longer-dated securities — with outlays of at least $4 billion — as 30-year yields have climbed to their loftiest point since 2007, according to Reuters. Even so, investors remained uneasy about the scale of U.S. fiscal deficits, the relentless volume of government and corporate debt coming to market, and the country's recently crossed $40 trillion debt threshold.

Michael Metcalfe, head of macro strategy at State Street $STT, told Reuters that rising yields are nearing a level at which equity markets could come under serious pressure. "We've seen a very long run of risk-taking activity on the part of investors. So we've had 108 consecutive days of investors adding to risk across assets. And that's literally just broken this week," he said.

The bond market's turbulence this week has been broad. Across G7 nations, 10-year benchmark yields climbed an average of close to 19 basis points over the week, marking the steepest weekly rise since the Iran war began, according to Reuters. In Europe, German bund yields for 10-year debt climbed to levels unseen since 2011, while their French counterparts pushed to a 2008 high of around 4.46%.

The selloff accelerated earlier this week as escalating Middle East conflict pushed oil prices higher and renewed inflation fears across major economies. After reaching above $108 a barrel on Thursday, Brent crude gave back those gains on Friday, settling roughly 3% lower near $104. Mohamed El-Erian, chief economic adviser at Allianz, warned last week that supply-demand imbalances — with government and corporate issuance outpacing the pool of reliable buyers — would keep pressure on yields.

Should the 10-year Treasury yield decisively clear 5% and hold there, some analysts believe bonds would begin drawing capital away from stock markets by offering comparably attractive returns.

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