Treasury yields ease from highs since 2002, but the climb was real yields

Bond funds edged up this week as Treasury yields fell a few basis points from the highest levels since 2002. The month-long climb to those highs was in real yields.

The 10-year yield finished Friday at 5.24%, the 30-year at 5.60% and the 2-year at 4.80%. These are the Treasury's daily par yields, a curve drawn from market prices rather than the yield on any one bond. From the prior Friday, that was a drop of 4 basis points at the 10-year, 3 at the 30-year and 3 at the 2-year.

CNBC reported Monday, October 5, that the 10-year was at its highest since 2002. On these par yields, 5.31% on Monday was the week's highest 10-year close, and 5.67% on Wednesday was the highest 30-year close.

From September 9 to October 9, the 10-year par yield rose 41 basis points, from 4.83% to 5.24%. The 10-year real yield, the yield on inflation-protected Treasuries, rose 45 basis points, from 2.46% to 2.91%. The gap between the two fell to 2.33%, from 2.37%.

Over that month the iShares 7-10 Year Treasury Bond ETF BIEF fell 2.7% in price, and the iShares TIPS Bond ETF BTIP fell 2.2%. The iShares 20+ Year Treasury Bond ETF BTLT is down 4.6% from the September 9 close. The inflation adjustment in BTIP did not offset a higher real yield.

Yields backed off the highs

Reuters reported Wednesday, October 7, that Treasuries rose in the afternoon, with yields backing away from their highs as oil prices fell and after a strong auction of $39 billion of 10-year notes. The notes sold at 5.3%. CME Group's record of the sale put the bid-to-cover ratio, the dollars bid for every dollar sold, at 2.77.

On Thursday, October 8, the Treasury sold $22 billion of 30-year bonds at a yield of 5.618%, with a bid-to-cover of 2.54. Reuters said that auction met solid demand, and that analysts called it a big factor in that day's rally. Earlier in the session, higher oil prices had pressured Treasuries, Reuters reported.

The minutes still point to another increase

Minutes of the September 15 and 16 meeting, released Wednesday, October 7, said most participants judged that another increase in the federal funds target range would likely be appropriate by year end. The minutes did not assign that increase to the October 27 and 28 meeting. The Committee had raised the range on September 16, to 3.75% to 4%, and every member agreed.

Fed Governor Christopher Waller spoke Thursday, October 8, at the Istanbul Economic Forum, hosted by Turkey's central bank.

"If the economic data continue to come in as expected, I anticipate additional hikes to support a timelier return of inflation to our 2 percent goal. But there is some flexibility about when those hikes will occur. The hikes do not need to come at consecutive meetings, but they should be in place in an acceptable period of time."

He said futures prices as of Wednesday, October 7, showed an 85% chance of at least one increase by the December meeting, and nearly a 20% chance of two increases.

September's consumer price index arrives Wednesday, October 14, at 8:30 a.m. Eastern time, before the Fed meets on October 27 and 28.

A few basis points, felt at the long end

A basis point is a different event in a bill fund than in a long-bond fund. Prices move opposite yields, and longer bonds move more. These are price changes from the October 2 close to the October 9 close.

The long fund rose more than the bill fund. A small drop in yields moves a long bond's price more than a bill's.

The iShares Core U.S. Aggregate Bond ETF AAGG, which tracks the Bloomberg U.S. Aggregate Bond Index, rose 0.36% in price. Its total return for 2026 through Friday, income included, was still down 2.7%.

U.S. fixed-income ETFs took in $25.16 billion over the five trading days through Thursday, October 8, ETF Action reported Friday, using FactSet estimates. That day's $5.41 billion went to investment-grade corporates, Treasury bills, long Treasuries and municipals.

Broad credit funds still rose

Investment-grade companies paid a little less extra yield over Treasuries by midweek. Broad high-yield bonds paid a little more. The large funds of both still rose in price.

That extra yield on the ICE BofA US Corporate Index was 82 basis points on Wednesday, down from 85 on October 2, on the St. Louis Fed's series. The iShares iBoxx $ Investment Grade Corporate Bond ETF ALQD rose 0.57% in price.

The ICE BofA US High Yield Index spread was 315 basis points on Thursday, up from 310 on October 2. The iShares iBoxx $ High Yield Corporate Bond ETF BHYG rose 0.42% in price, and the iShares Broad USD High Yield Corporate Bond ETF AUSHY rose 0.51%.

Cincinnati Asset Management, in its October 9 high-yield weekly, said CCC-rated bonds yielded 15.07% on Thursday, a four-year high, with a spread of 1,014 basis points, the widest since March 2023. That spread was 885 basis points on September 11. The firm said CCC spreads widened 237 basis points in the third quarter, against 31 for BB-rated bonds and 24 for B-rated bonds.

As of October 8, iShares listed 58.7% of BHYG as rated BB and 32.4% as rated B.

Municipals still show September

Municipals got less out of this week than Treasuries did. The iShares National Muni Bond ETF AMUB rose 0.12% in price, and the Vanguard Tax-Exempt Bond ETF AVTEB rose 0.15%. For 2026 through Friday, total return, they are down 3.6% and 3.8%.

Nuveen, in an October 5 note from Dan Close, its head of municipals, said the Bloomberg Municipal Index lost 4.36% in September, the worst month since 2008, and 6.35% in the third quarter, the worst quarter since 1981. The note tied that quarter to a rapid repricing of rates, and called September issuance the highest on record.

What the week leaves

A few basis points off the week's high is a pause at a higher real yield, with another increase still the Fed's own baseline for the year.