Trading Day: US yields cross 5% threshold​

By Jamie McGeever

ORLANDO, Florida, Sept 23 (Reuters) - US bond yields soared on Wednesday, in many cases to the highest since 2007, and expectations of an interest rate hike next month surged, after figures showed that US business activity is expanding at its fastest pace in more than five years.

The sharp rise in market borrowing costs, and higher oil prices, pushed stocks into the red.

In my column today, I look at the risk to ordinary investors posed by the record concentration of US stock market value in AI and 'tech-adjacent' companies. Passively managed index tracker funds are essentially tech funds now.

Today's Key Reads

• Pezeshkian says Iran won't surrender, after Trump's annihilation threat

• US business activity at more than five-year high; inflation pressures building

• There's a reason Trump is the only one talking about 1% interest rates

• Darkest before dawn? Funds mull return to bonds: Mike Dolan

• Trump's diesel export dilemma — Good politics, bad economics: Bousso

• Today's Key Market Moves STOCKS: Wall Street down: Dow -0.7%, S&P 500 -0.8%, Nasdaq -1.1%. Europe -0.4%.SECTORS/SHARES: Every sector on the S&P 500 falls except energy, which rises 1%. Comms services, utilities -2%. Expedia, Airbnb -8%. Booking Holdings, McDonald's -5%. Palo Alto Networks, CrowdStrike Holdings +5%.FX: Dollar leaps 0.5% to highest in nearly 2 months. Dollar/yen above 158.00.BONDS: French 10y 4.60%, US 10y 5.10%, highest since 2007-08. Extremely weak US 5y auction - lowest demand since 2018.COMMODITIES/METALS: Oil snaps 5-day losing streak, Brent +4%, WTI +2%. US diesel futures -2% to 2-week low. Gold -1.5%.

Today's Talking Points:

'Risk free' 5%

The yield on every US Treasury note or bond, with the exception of the two-year note, traded above 5% on Wednesday, with the five-year yield crossing that threshold for the first time since 2007. The two-year yield is only 5 basis points away, so it's conceivable that the whole US Treasury yield curve could be above 5% later this week. That would also be a first since 2007.

It's only a number, but it could have psychological significance. It could tempt all kinds of investors to diversify away from expensive stocks and lock in attractive returns on 'risk-free' assets (the real yield on 10-year TIPS is 2.78%, the highest since 2008).

On the other hand, today's 5-year auction was awful. These yields are a reminder that we are in a brave new world, where the cost of capital is high and seemingly heading higher. Debt servicing — for consumers, businesses and the Treasury — is getting more expensive. Buckle up.

Here Xi comes

Chinese President Xi Jinping arrives in Washington for his summit on Thursday with US President Donald Trump. The visit will be marked with pomp, pageantry and platitudes, but will it yield much else? Investors' expectations are low, but Treasury Secretary Scott Bessent indicated on Wednesday that there may be some progress on trade.

Bessent said the US is open to extending the trade truce that expires on November 10 or considering a possibly larger trade deal, without giving details, other than it was the Chinese delegation's proposal. If Trump and Xi reach agreement on trade, there's unlikely to be much cooperation on AI. Mutual trust is low, and neither side wants to slow down development.

Diesel down

US diesel futures slid 2% on Wednesday to a two-week low, reacting to comments from Trump the day before that he backs a ban on US diesel exports as a way to cool record high prices at the pump. Politico also reported that the administration was preparing a 90-day ban, which a White House official denied.

Confused? Trump will no doubt be desperate to get diesel prices down, especially ahead of the US midterm elections in November. But while an export ban might play well politically, it may not have the desired effect, as it could push US refineries to cut the amount of crude they process, which would reduce the amount of gasoline and other products produced, which could raise prices.

What could move markets tomorrow?

• Chinese President Xi Jinping visits US President Donald Trump in Washington

• Japan PMIs (September, flash estimate)

• Germany Ifo business index (September)

• US Treasury sells $44 billion of 7-year notes at auction

• US Federal Reserve officials scheduled to speak include New York Fed President John Williams, Richmond Fed President Thomas Barkin, Philadelphia Fed President Anna Paulson, and Cleveland Fed President Beth Hammack

Want to receive Trading Day in your inbox every weekday morning? Sign up for my newsletter here. Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

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(Reporting by Jamie McGeever;Editing by Bill Berkrot)