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Treasury yields and mortgage rates have surged to levels not seen since before the 2008 financial crisis, as a string of strong economic data raises the odds that the Federal Reserve will raise interest rates again at its October meeting. A survey showed U.S. business activity rose to a more-than-five-year high in September, pushing yields higher and lifting expectations of another increase, a financial markets research firm said.
Business Activity Hits Fastest Pace Since 2021
The flash S&P Global US PMI Composite Output Index climbed from 56.0 in August to 58.4 in September, marking the fastest expansion since July 2021, S&P Global reported. The gains were broad-based. The service sector posted a reading of 58.7, up from 56.5, representing the steepest rise in output in more than five years, S&P Global said. Manufacturing also picked up pace, rising to 56.7 from 53.1.
Behind the numbers lies a labor market and order pipeline that are both heating up. Companies’ backlogs of uncompleted orders rose at the sharpest rate since May 2022, S&P Global said, a sign that demand is outpacing firms’ ability to keep up. That backlog growth encouraged businesses to hire at a rate not seen since June 2022, suggesting employers are betting the current burst of demand will last.
But the same report carried a warning sign for prices. Input costs jumped at the steepest rate in nearly four years, and supply chain delays and capacity constraints are likely to sustain inflationary pressures, S&P Global said. That combination of robust growth and rising costs is precisely what has investors and policymakers bracing for tighter monetary policy.
The Fed’s Next Move
This burst of economic strength comes just one week after the Fed raised its benchmark rate by 25 basis points to a range of 3.75% to 4.00% and projected one more increase before year-end, a financial markets research firm said. An economic data provider confirmed the Fed unanimously approved the quarter-point hike in September 2026, marking its first rate increase since 2023.
The central bank’s updated projections show most officials expect the tightening cycle isn’t finished. Sixteen of 18 officials see the possibility of at least one more 25-basis-point hike later this year, with four penciling in two additional increases, Federal Reserve officials said. Recent commentary from within the Fed has reinforced that outlook. Philadelphia Fed President Paulson and New York Fed President Williams both hinted at more hikes this week, citing inflation that remains sticky, a financial markets research firm said. Markets are now pricing in roughly 60% odds of an October move, the firm added.
Inflation data helps explain the Fed’s caution. U.S. headline inflation held at 3.4% year-on-year in August, while core inflation stood at 2.4%, an economic data provider said. Those levels remain above the Fed’s long-term target, giving policymakers little room to ease off even as growth accelerates.
Treasury Auctions Signal Shifting Appetite
Bond markets have already begun pricing in the prospect of further hikes, and a recent Treasury auction added fuel to the move. Demand was weak at a $70 billion 5-year Treasury auction, which pushed 5-year yields above 5%, a financial markets research firm said. Earlier in the week, the 2-year Treasury note auction drew its highest yield in more than two years at 4.787%, though demand for that shorter-term debt was solid, the firm noted. The combination of strong economic data and a weak 5-year auction sent long-term yields to levels last seen before the financial crisis, with markets now leaning toward another hike in October, the firm said.
Mortgage Rates Climb Toward 7.25%
The rise in yields is being felt directly by homebuyers. The average interest rate for a 30-year, fixed-rate conforming mortgage loan in the U.S. now stands at 7.229%, up from the day before, according to Mortgage Research Center data cited by a financial news outlet.
That follows a similar climb reported earlier in the month. The 30-year fixed-rate mortgage had soared to 7.19%, according to Mortgage News Daily data cited by a financial news outlet. Consider how far rates have moved in a short window:
- Up roughly 38 basis points since the Jackson Hole speech
- More than a full percentage point higher than a year ago
- Now approaching levels that predate the 2008 financial crisis
For prospective homebuyers, the jump translates into meaningfully higher monthly payments and reduced purchasing power, at a time when the broader economy is showing few signs of slowing. Strong hiring, rising backlogs, and accelerating service-sector output all point to an economy still running hot, even as borrowing costs climb toward multi-year highs.
With inflation still above target and Fed officials publicly floating additional hikes, investors are left watching for confirmation at the central bank’s October meeting. Whether the Fed follows through on a second increase this year will likely hinge on whether September’s burst of business activity proves durable or fades as higher rates work their way through the economy.
