Hot Economic Data Pushes Bond Yields to Highest Level Since 2007, Rattles Stocks

The yield on the 10-year U.S. Treasury note climbed to roughly 5.1% on Wednesday, its highest level since 2007, after a closely watched survey showed American businesses expanding at their fastest pace in more than five years. The reading added fresh evidence that the economy is running hot even as the Federal Reserve raised interest rates for the first time since 2023 just a week earlier, and it pushed stocks lower as investors recalculated how much further the central bank may need to go.

The S&P 500 was down about 0.8%, the Nasdaq Composite off roughly 1.3% and the Dow Jones Industrial Average lower by more than 300 points in trading Wednesday, with the small-cap Russell 2000 falling nearly 1.7%, according to market data reported by Yahoo Finance. The 30-year Treasury yield also jumped, to about 5.37%, a level not seen since before the 2008 financial crisis, and crude oil pushed higher too, with Brent crossing $100 a barrel and U.S. crude nearing $92.

A hotter economy than forecast

The trigger was the flash Purchasing Managers' Index from S&P Global, released Wednesday morning. The survey's composite output gauge rose to 58.4 in September from 56.0 in August, its highest reading since July 2021 and the fourth straight month of acceleration, according to the S&P Global press release. Services output jumped to 58.7 from 56.5, while manufacturing rose to 57.0 from 53.9, both far above economists' forecasts of roughly 55 and 54, respectively.

New orders grew at the fastest rate since April 2022, and employment increased at the sharpest pace in more than four years as firms scrambled to keep up with demand, S&P Global said. The survey also flagged a downside: input costs, driven by fuel, transport and wages, rose at the steepest rate in four years, and supplier delivery times lengthened by the most since mid-2022 — classic signs of an economy running up against capacity constraints.

"Business is clearly booming now in both manufacturing and services," S&P Global chief business economist Chris Williamson said, according to a Bloomberg News account of the report, while also pointing to "severe supply chain bottlenecks" and "increasing problems finding suitable staff."

A one-two punch with the Fed

The data landed exactly one week after the Federal Reserve's rate-setting committee raised its benchmark federal funds rate a quarter point, to a range of 3.75% to 4.00%, its first increase since 2023. The committee said in its statement that inflation "remains elevated" and that the move would "support a timelier return" to its 2% target. Updated projections released alongside the decision showed most policymakers expect at least one more increase before year-end.

Those expectations firmed further on Wednesday. Federal Reserve Governor Michael Barr, speaking at a housing affordability conference hosted by the Federal Reserve Bank of Chicago, said the rate increase approved last week was a necessary "recalibration" and that more may be needed.

"In my base case, further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion," Barr said in remarks published by the Federal Reserve, adding that "risks to achieving our inflation target have increased, while risks to the labor market have receded."

Barr attributed the inflation pressure in part to "a series of shocks" over the past year and a half, citing tariffs, the conflict in the Middle East and a surge in investment tied to the artificial-intelligence buildout. Traders responded by pricing in roughly even odds of another rate increase as soon as October, with a move by December seen as close to certain, according to NBC News' market coverage.

Who is affected

Higher long-term yields ripple quickly through the economy. Treasury yields are the benchmark against which mortgages, corporate bonds, auto loans and other credit are priced, so Wednesday's move raises borrowing costs broadly even before the Fed's next policy meeting. NBC News reported the average rate on a 30-year fixed mortgage stood at 7.17%, squeezing prospective homebuyers already contending with high prices.

Companies that carry variable-rate debt or need to refinance bonds face steeper costs as well, a particular concern for smaller, more leveraged firms — a dynamic reflected in the Russell 2000's outsized decline Wednesday. Equity investors more broadly are recalibrating what higher-for-longer rates mean for stock valuations, which is part of why growth-heavy indexes such as the Nasdaq, still not far removed from record highs reached earlier in the week, sold off harder than the Dow.

• Composite flash PMI: 58.4 in September, up from 56.0 in August — highest since July 2021
• 10-year Treasury yield: roughly 5.1%, highest since 2007
• Fed funds rate: 3.75%-4.00% after the September 16 increase, the first since 2023
• Average 30-year fixed mortgage rate: 7.17%

What happens next

Investors will get more evidence before the Fed's next scheduled meeting, including the central bank's preferred inflation gauge, the personal consumption expenditures price index, due later this month, along with the next monthly jobs report. Gregory Daco, chief economist at EY-Parthenon, said the Fed appears "on track for an additional 25-basis-point rate hike in December," a view consistent with the median projection Fed officials themselves released last week.

For now, the bond market's message is that Wednesday's data made a pause less likely, not more. A composite PMI at its highest level since mid-2021, paired with a central bank that has just resumed raising rates after a three-year hold, has left traders bracing for a stretch in which good economic news is read by markets as bad news for borrowing costs — and, for now, for stock prices.