What's behind the move?

Drew O’Neil discusses fixed income market conditions and offers insight for bond investors.

Does the Treasury market have your attention? Yields have pushed higher with some points on the curve reaching yield levels not seen since the mid-2000s. While it is nearly impossible to pinpoint a specific catalyst for any move in the financial markets, below are a few of the factors that have helped push interest rates higher.

• The ongoing conflict in the Middle East is approaching its 7th month. The supply disruptions and higher oil prices that were initially expected to last only a few months are becoming entrenched and are inflationary. Following the mid-summer dip where a gallon of gas fell to ~$3.80/gallon, the price has moved back higher and currently sits at ~$4.50/gallon. Diesel fuel prices carry a broader economic influence through truck transportation and farm equipment operations. A gallon of diesel has risen from $3.75/gallon at the start of the war with Iran to its current level of over $6.50/gallon. While the hope is that the U.S./Iran conflict gets resolved soon, the longer it drags on, the more long-term uncertainty it creates in the market. Regardless of the root cause, uncertainty about the future generally means that investors are going to require a higher interest rate in return for their investment. This can push yields higher.
• The economy remains strong. Overall, GDP has come in higher than 2026 forecasts. More recently, Retail Sales data for August was stronger than expected. Last week’s PMI (Purchasing Managers’ Index) data came in much better than anticipated, with the growth in business activity reaching its highest level since 2001 and the corresponding employment data within the PMI survey rising at its fastest pace since 2022. The PMI survey reported that input costs hit their highest level since October 2022, fueling inflationary fears. Stronger growth can push yields up as investment dollars demand higher yields in order to buy bonds rather than invest in other opportunities that might offer more attractive returns. Additionally, a tighter labor market can lead to worries about a wage-price inflation spiral (higher wages lead to higher prices which leads to workers demanding even higher wages, and so on) and yields tend to increase.
• The fiscal deficit and the increasing U.S. borrowing trendline has many investors concerned or at least paying very close attention. With seemingly no motivation by either of Washington’s political parties to address the issue, investors can demand more risk premium when investing in U.S. Treasuries, especially for longer periods of time. Increased Treasury issuance needed to fund the deficit, combined with the surge in corporate borrowing to finance the AI infrastructure buildout adds to the volume of longer-maturity bonds the market needs to absorb, and can put upward pressure on the supply side of the equation and influence yields higher.
• The outlook for future policy decisions by the FOMC has shifted. At the start of the year, markets were expecting 50 basis points of cuts to the Fed Funds rate over the course of 2026. Fast forward to today and we have seen a 25 basis point hike with an additional 25 to 50 basis points of hikes expected by the end of the year. If the FOMC were to hike rates another 50 basis points, that would put the year-end Fed Funds rate 125 basis points higher than markets were anticipating at the start of the year. While this would likely have less of an impact on longer-maturity yields, Fed Funds rate changes can have significant impact on the short-end of the yield curve.

What’s the takeaway for investors? The factors listed above, combined with many other market forces, have created opportunities for investors to lock in yields that in some parts of the fixed income market have not been available for 15 to 20 years. The 30-year Treasury yield has moved north of 5.50% for the first time since 2004. The 30-year AAA municipal yield has eclipsed 5.00% for the first time since 2011. Intermediate maturity investment-grade corporate bond yields in the mid-5% to low-6% range are readily available. The ability to lock in these levels of income for extended periods of time is an attractive opportunity that may or may not last for a prolonged period. A resolution to the conflict in the Middle East, a few data points, or a shift in rhetoric from FOMC or government officials could potentially turn things around quickly and eliminate this window of opportunity. Talk with your financial advisor today about current available opportunities that align with your long-term financial plan.

The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.

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To learn more about the risks and rewards of investing in fixed income, access the Financial Industry Regulatory Authority’s website at finra.org/investors/learn-to-invest/types-investments/bonds and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) at emma.msrb.org.