Yield on 10-year Treasury touches its highest level of Trump 2.0 as oil climbs back about $90 a barrel

Stocks dropped Monday as bond yields and oil prices rose.

The summer selloff in long-dated Treasurys gathered more steam on Monday, driving stocks lower for a second session in a row and pushing costs to borrow money higher.

The yield on the all-important 10-year Treasury note BX:TMUBMUSD10Y climbed above 4.757% for the first time since Jan. 14, 2025, according to Dow Jones Market Data. It rose as the Iran conflict intensified and Brent crude prices (BRN00) reclaimed $90 a barrel.

At 4.75%, that's also a point where "people really start to sit up and take notice," said Robert Pavlik, senior portfolio manager at Dakota Wealth Management. People start worrying about it hitting 5% "and start thinking we are headed toward a correction" for the stock market, he said.

Despite Monday's pullback, stocks still posted decent gains in August, with the Dow Jones Industrial Average DJIA up 1.3% - it has now risen for five straight months - while the S&P 500 SPX was 2.6% higher in August and the Nasdaq Composite COMP was up 3.9% for the month.

Yet things could quickly get trickier in September for stocks and bonds if the cost of capital keeps rising.

Bond yields matter to households because the 10-year Treasury rate serves as a starting point for new 30-year mortgage loans. Treasurys already were under pressure when the national debt hit $40 trillion in August. Yet U.S. government bonds also now compete for capital from major technology companies issuing a deluge of longer-dated bonds to finance the artificial intelligence build-out.

There's another roughly $200 billion flood of new, highly rated corporate-bond supply expected in September.

Treasury Secretary Scott Bessent said Monday, during a CNBC interview, that he and Federal Reserve Chair Kevin Warsh were on the same page about the roughly $31.5 trillion Treasury market, noting that domestic yields have been fairly calm in August versus elsewhere in the world.

The Treasury Department surprised markets in mid-August with plans for bigger buybacks of 10-year through 30-year Treasurys, starting in September. Yet as the below chart shows, the benchmark 10-year rate is now at the highs of President Donald Trump's second term in the White House.

The 30-year Treasury yield BX:TMUBMUSD30Y was up 4 basis points (0.04 percentage points) to 5.248% on Monday. The Treasury's enhanced buybacks were announced after yields eclipsed 5.3% in August, the highest since 2007. The Treasury and the Fed may now feel it's enough just to help stabilize U.S. government bond yields, rather than try to coax them lower.

"This is a much more normal interest-rate environment than I've experienced for years," said Drew Matus, chief market strategist at MetLife Investment Management, on Monday. "I really do think this is kind of a normalization trade."

Still, Matus said the 10-year yield's move above the 3.5% to 4.5% "sweet spot" can pressure households to save more and put downward pressure on the economy. This year, the artificial-intelligence trade has lifted the stock market - and kept households with growing equity portfolios spending, he added.

"Rates are certainly front and center, though I wouldn't say they're firmly in control of equities," said Garrett Melson, portfolio strategist at Natixis Investment Managers.

"In addition to the uncertainty around Fed policy and the selloff at the long end, the [stock] market still seems to be somewhat grappling with the fallout from the momentum unwind and searching for direction and new leadership," he added.

Aside from typical seasonal weakness, the U.S. midterm elections also loom in just two months. "So clearly, there are other factors complicating the calculus," Melson said. He thinks any further move higher in yields would only exacerbate those headwinds, particularly with the recent backdrop of less-robust hard economic data over the past few months.

All that makes Friday's jobs report for August a key point of focus for investors. Any weakness could reignite worries about a softening labor market, which could trigger a rally in long-dated bond yields.

With the 10-year Treasury yield hitting 4.75%, Chris Galipeau, head market strategist at the Franklin Templeton Institute, said he's been urging clients to add some duration in bonds, in the five-year to eight-year range.

"The stock market will handle this level fine," Galipeau told MarketWatch, adding that he also recommends buying any pullback in stocks. However, he thinks equities "could get in a little bit of trouble" if the 10-year yield starts pushing above 5%.

The 10-year yield briefly hit 5% in 2023, but then sparked significant buying from investors, which led to lower yields. Bond prices and yields move in the opposite direction.

"There's nothing like attractive real yields and a whiff of slower growth to shift the narrative and spur a renewed bid into rates," said Melson at Natixis.

-Joy Wiltermuth