A deepening global bond selloff pushed Japan's 10-year yield to 3.075%, its highest since 1996, and held the U.S. 10-year above 5.12% after strong September manufacturing data. Futures now price a 57% chance the Fed hikes 25 basis points at each of its final two 2026 meetings, up from 38% a week ago, pressuring equities worldwide.
Japanese government bonds fell across the curve on Thursday, driving the 10-year yield up 10 basis points to 3.075%, its highest since 1996, as a bond rout that began in New York spread through every major market and pulled equity futures lower.
The move extended a selloff that pushed the U.S. 10-year Treasury yield above 5.12% on Wednesday, a 19-year high, after S&P Global's flash U.S. manufacturing PMI rose to 57 in September from 53.9 in August — the largest improvement in factory conditions since May 2022. The same report showed average input costs across goods and services surging, leaving investors to read strong growth as a reason for the Federal Reserve to keep policy tight rather than ease.
"The market is repricing the entire path of policy, not just the next meeting," said James Okafor, rates strategist at Edgen. "When growth data beats this decisively and price pressures build in the same release, the bond market has no choice but to take the Fed at its word on holding higher for longer."
Futures markets now assign a 57% probability that the Fed raises rates by 25 basis points at each of its final two meetings of 2026, in November and December, according to the CME FedWatch tool. That is up from 38% a week ago. The repricing has been global: Japan's five-year yield climbed about 10 basis points to 2.375% and the 20-year rose a similar amount to 3.915%, with the Tokyo market catching up after the three-day Silver Week holiday.
Equities followed the move in yields. The S&P 500 dropped nearly 1% on Wednesday and the Nasdaq fell more than 1%, with only energy and industrials finishing in the green. Stocks slid across the globe in early European trade Thursday and U.S. stock futures pointed lower, as the implications of higher oil prices compounded the pressure from rates.
Energy was the strongest sector on Wednesday, lifted by a rise in crude after five consecutive sessions of declines. President Donald Trump said U.S. officials had a "very good meeting" with Iran's delegation at the United Nations on Tuesday, but nothing concrete was announced on a lasting peace or a full reopening of the Strait of Hormuz, through which as much as 25% of the world's oil supply passed before the U.S.-Iran war. Higher crude feeds directly into the inflation picture that is already driving yields higher, tightening the squeeze on growth-sensitive sectors.
The last time the U.S. 10-year yield traded above 5.12%, in 2007, the S&P 500 was within weeks of a peak that preceded a 57% drawdown over the following 17 months. That comparison is not a forecast, but it explains why portfolio managers are trimming risk rather than buying the dip.
The transmission chain runs in one direction for now. Higher Treasury yields lift the discount rate applied to future corporate earnings, raise borrowing costs for leveraged companies and households, and strengthen the dollar — all of which weigh on equity valuations. Japan's bond market adds a second channel: as domestic yields rise, the case for Japanese investors to repatriate capital from overseas bond markets strengthens, a dynamic that has historically amplified selling in U.S. and European debt.
For the Fed, the arithmetic is uncomfortable. A manufacturing PMI at 57 is consistent with an economy running well above trend, and input-cost pressures in the same release undercut the case for near-term cuts. The November meeting is the next scheduled test, followed by December, and futures pricing now leans toward a hike at both rather than a hold.
The near-term path depends on whether the growth data cools or the inflation component of the PMI proves a one-month spike. If input costs ease in October's release, yields could stabilize and equities recover. If they do not, the bond selloff has room to run, and the equity market's ability to absorb a 5%+ 10-year Treasury yield will be tested again.
This article is for informational purposes only and does not constitute investment advice.
