US stocks fall as 10-year Treasury yield hits highest since 2007

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By Karen Brettell
NEW YORK, Sept 23 (Reuters) - US shares fell and benchmark 10-year Treasury yields climbed to their highest level since 2007 on Wednesday, after data showed US business activity racing to a more-than-five-year high in September, fueled by a surge in new orders.
S&P Global said on Wednesday its flash US Composite PMI Output Index, which tracks the manufacturing and services sectors, increased to 58.4 this month, the highest level since July 2021.
"They're painting a picture of the economy not just being resilient, but overheating, and in that sense, robust economic growth is no longer balanced, it's adding to inflationary pressures,” said Will Compernolle, macro strategist at FHN Financial.
Yields have climbed to multi-year highs as traders price in the likelihood of further Federal Reserve interest rate hikes, with inflation remaining stubbornly above the central bank's 2% annual target.
Interest rate-sensitive 2-year Treasury yields rose 11.4 basis points to 4.891%, after rising as high as 4.947%, the highest since May 2024. The benchmark 10-year yield jumped 13.89 basis points to 5.106%, the highest since 2007 and its biggest one-day increase since April 2025.
Fed funds futures traders are now pricing in a 66% chance of an October rate hike, up from 53% earlier in the day.
Adding to the hawkish tone, Fed Governor Michael Barr said that the central bank took an important step last week to "recalibrate" short-term borrowing costs to bring down inflation, and signaled that further rate hikes will likely be needed.
A break through key technical levels amplified the rise in rates, analysts said.
"It looks like for now the technical boundaries that had kept a lid on yields for the last few weeks are just broken, and once this momentum starts it can make traders very hesitant to step in front of it,” Compernolle said.
The US Treasury Department also drew very weak demand for a $70 billion 5-year note auction amid the bond market selloff, with the notes selling at the highest yield at an auction since 2007.
Stocks slid as yields climbed. Higher rates can weigh on equities both by raising the cost of financing corporate investment and by luring buyers back into the bond market.
The Dow Jones Industrial Average fell 0.68% and the S&P 500 dropped 0.75%. The Nasdaq Composite was down 1.13%, a sharp reversal after hitting a record high on Tuesday.
The pan-European STOXX 600 index slid 0.44% and an MSCI index of global stocks fell 0.73%, snapping four consecutive days of gains.
GEOPOLITICS IN FOCUS
Sentiment was further dampened by comments from Iranian leaders on Wednesday, underscoring that the US and Iran remain far apart on reaching a peace deal.
A senior Iranian official told Reuters that diplomacy must continue even as the two sides remain divided on how to end the war, after Iranian President Masoud Pezeshkian told the UN General Assembly that Tehran would never bow to US pressure.
President Donald Trump, addressing the same forum on Tuesday, threatened to "annihilate" Iran but also said his envoys had held productive talks with mediators seeking to end the conflict.
"We've been through a series of starts and stops like this," said Cole Smead, CEO and portfolio manager at Smead Capital Management. "We're in a pretty momentum-dominated market. I don't think most people feel comfortable stepping in the way of headlines."
US crude rose 2.3% to $92.60 a barrel and Brent rose to $103.50 per barrel, up 4.28% on the day.
Investors are also looking ahead to a summit between Trump and Chinese President Xi Jinping in Washington, where tensions over trade, technology and Tehran are expected to play out against a backdrop of pomp and ceremony.
DOLLAR GAINS
The prospect of higher rates helped to boost the dollar to multi-week highs versus the euro, sterling and the Canadian dollar. The euro dropped 0.55% to $1.1384 and had reached $1.1367, the lowest since July 28.
The dollar was 0.61% firmer against the yen at 158.33, with speculators wary of drawing more Japanese intervention on any push past 160.00.
Spot gold fell 1.64% to $4,283.40 an ounce.
(Reporting by Karen Brettell and Niket Nishant; Editing by Christopher Cushing, Kim Coghill and Gareth Jones)
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