What It Will Take for Bond Yields to Drop

Any relief in Treasury bonds has been short-lived. (AFP via Getty Images)

Key Points

• The U.S. 10-year Treasury yield has risen for five straight weeks, marking its longest such streak since 2024.
• The iShares 20+ Year Treasury Bond ETF closed at a record low of $77.48 on Friday.
• The U.S. unemployment rate ticked up to 4.2% in September from 4.1% in August, which was weaker than expected.

The Treasury market can’t catch a break.

The battered U.S. government bond market saw a textbook safe haven trade play out this week: A mini bond crisis in France, reports of Iran war escalating on Thursday, and the release of weak labor data on Friday all pulled down 10-year yields . By Friday morning, the yield on benchmark 10-year note was down 0.13 percentage point from multi-decade high reached on Wednesday. The fall coincided with declining expectations of Federal Reserve rate hikes. (Lower yields mean higher bond prices.)

But the relief was short-lived. The optimism evaporated by Friday afternoon, dragging the bond market right back into the fire.

The 10-year yield has now risen for five straight weeks, for the longest such streak since 2024 . The popular iShares 20+ Year Treasury Bond ETF closed at a record low of $77.48 on Friday.

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“When we saw the 10-year yield decline, I think it was more of a seller exhaustion,” says Tom Essaye, founder and president of Sevens Report. “I mean, you haven’t seen Treasuries this stretched to one side in several years.”

But nothing “changed the equation of what has pushed yields up and I think the bond market is just reflecting that,” Essaye adds, pointing to above-trend inflation and the continuing conflict in Iran. “The reaction to the jobs report was probably algorithms.”

One thing that could meaningfully bring down yields is deterioration in the labor market. While Friday’s report was weaker than expected, with the U.S. unemployment rate ticking up to 4.2% in September from 4.1% in August, it still seems strong enough to withstand further Fed hikes. It also points to economic strength that is keeping investors in stocks over safe-haven assets like Treasuries.

The market needs to see “a sizable increase in the unemployment rate and/or a substantial undershoot of payrolls to truly derail the momentum underlying” the bond rout, writes Ian Lyngen, Head of U.S. Rates Strategy at BMO Capital Markets.

Another thing that could drive down yields is an investor rotation out of European government bonds and into Treasuries. While U.S. deficits are high, the fiscal situation in France is causing more immediate concerns on the part of investors. The French debt burden is set to top 120% of gross domestic product next year, and French bond yields have spiked.

Beyond positioning factors, Treasuries would look a lot more appealing if the U.S. brought down the deficit, ended the Iran war, and reduced issuance of debt—but these would require substantial policy shifts on the part of Congress and President Trump.

“Ultimately, today’s move is a reminder that long-term Treasury yields are being driven by more than just Fed expectations,” wrote Joyce Huang, Head of Multisector Fixed Income at Vanguard.

Until the broader causes of the bond selloff are addressed, it’s unlikely that it will turn around anytime soon.

Write to Karishma Vanjani at karishma.vanjani@dowjones.com.

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