By Karen Brettell
NEW YORK, Sept 24 (Reuters) - Longer-dated US Treasury yields retreated from earlier highs after 30-year yields touched a more-than-20-year peak, though they stayed elevated as nerves over renewed inflation and further central bank rate hikes kept investors on edge.
Oil prices rose about 2% on Thursday as US-Iran diplomatic talks showed little sign of progress, while investors also weighed uncertainty over a potential US ban on diesel exports.
A sharp selloff on Wednesday left global
bond investors wary, pushing benchmark 10-year yields to their largest daily increase since the April 2025 tariff turmoil. The move was driven in part by stronger-than-expected US business activity data, which showed prices paid surged to a nearly four-year high this month.
Traders are worried that higher bond yields could derail the equity rally by making borrowing more expensive and drawing investors out of stocks and into bonds. So far, though, financial conditions still appear supportive of a resilient economy and stock market.
“Nothing in the data suggests policy is currently restrictive,” said Antonio Del Favero, head of US rates strategy at Macro Hive. He added that absent a drop of 20% or more in the S&P 500, and an even steeper decline in the Nasdaq Composite, sustained over an extended period, financial conditions are likely to remain loose.
The MSCI World Index halved in value the last time the 10-year Treasury yield broke above 5%, shortly before the global financial crisis.
A similar slump occurred less than a decade earlier, when a spike to nearly 6.8% helped burst the dotcom bubble.
RATE HIKE ODDS CLIMB
The Dow Jones Industrial Average fell 0.37% and the S&P 500 dropped 0.23%. The Nasdaq Composite was down 0.51%, after reaching a record high on Tuesday.
MSCI's World Index fell 0.37% and the pan-European STOXX 600 index dipped 0.16%.
The interest-rate sensitive US 2-year note yield fell 3.31 basis points to 4.862%.
The yield on benchmark US 10-year notes fell 0.18 basis points to 5.112% after earlier reaching 5.1497%, the highest since 2007.
The 30-year bond yield rose 0.89 basis points to 5.4109% and earlier peaked at 5.4461%, the highest since 2004.
Fed funds futures traders are now pricing in 66% odds of a Fed hike next month, up from around 53% before the S&P data was released on Wednesday.
"Inflation is high, central bankers are giving hawkish messages, there's competition from the funding needs of the tech sector and there are no reassuring signs on the US debt trajectory," said AXA's Chief Economist Gilles Moec.
Attention now turns to investor demand at Thursday's $44 billion auction of 7-year Treasury notes, following weak interest at Wednesday's $70 billion sale of 5-year debt.
Separately, the Treasury Department said it will buy back up to $6 billion in 20- to 30-year Treasuries on Thursday, part of a program designed to support market liquidity.
Elsewhere, the yield gap between French and German 10-year debt widened to its broadest level since Mario Draghi's 2012 "Whatever it Takes" speech.
TRADE TENSIONS
US President Donald Trump was set to welcome Chinese President Xi Jinping to the White House on Thursday for a lavish state summit as both leaders sought to project stability despite deep underlying tensions.
While analysts expect few if any major breakthroughs, Washington and Beijing may extend their 11-month trade truce. Treasury Secretary Scott Bessent said the two sides had reached a deal on an initial two-month extension, as Trump personally greeted Xi at Joint Base Andrews in Maryland.
In the currency market, the euro fell 0.08% against the US dollar to $1.1371, earlier hitting a two-month low.
Against the Japanese yen, the dollar strengthened 0.32% to 158.78.
Spot gold fell 0.56% to $4,262.89 an ounce.
(Reporting Karen Brettell, Marc Jones and Naomi Rovnick; Editing by Louise Heavens, Alexandra Hudson and Aurora Ellis)
