5-year Treasury yield tops 5% for the first time since 2007 as October hike odds jump to 73%

The five-year Treasury yield rose above 5% on Wednesday for the first time since 2007, as traders moved quickly toward pricing another Federal Reserve rate hike next month. At 1:55 p.m. ET the five-year was at 5.005%, up 16 basis points on the day, according to CNBC's bond quotes. The two-year, the maturity most tied to Fed expectations, was up 12 basis points at 4.90%, and the 10-year was at 5.12%.

The odds of a quarter-point hike at the Fed's Oct. 27-28 meeting rose to 73% from 55% on Tuesday, according to CME's FedWatch tool as reported by CNBC. A month ago the same odds were below 10%. Investor's Business Daily reported that markets now lean toward two more hikes this year.

What moved it

Two things landed on the same morning. S&P Global's flash survey put its composite index at 58.4, a 62-month high, with services at 58.7 and manufacturing at 56.7, and said input costs rose at the steepest rate in four years, CNBC reported. And Fed Governor Michael Barr said "further policy adjustments are likely to be needed," which we covered here. In last week's projections, only two of 18 Fed officials did not expect another increase this year, according to CNBC.

How far the five-year has come

The Treasury's official close for the five-year was 4.83% on Monday and Tuesday. Wednesday's intraday level is about 17 basis points above that. The St. Louis Fed's historical series shows the last daily close at or above 5% was 5.01% on July 13, 2007. During the 2023 bond sell-off it peaked at 4.95% on Oct. 19, 2023. If Wednesday's level holds into the Treasury's official 5-year reading tonight, it would be the first 5% close in more than 19 years.

The 10-year gets the headlines because it drives mortgage rates, and we covered its move to a 2007 high this morning. For business owners the five-year matters more. Fixed-rate commercial real estate loans and equipment loans are commonly quoted as a spread over a Treasury of similar term, often the five-year.

What it means in money

These are our calculations. They show the effect of the move and are not a quote for any loan:

• A $1 million commercial mortgage on a 25-year amortization, fixed at a rate tied to the five-year: a 0.17-point rise, say from 7.00% to 7.17%, adds about $109 a month, or about $1,306 a year, to the payment. Anyone with a rate lock that expires soon, or a term sheet quoted last week, is most exposed.
• A $150,000 equipment loan over five years: the same 0.17-point rise, from 8.00% to 8.17%, adds about $12 a month. The move is small for a single piece of equipment and adds up quickly across a fleet.
• A $250,000 line of credit priced at prime: the bank prime rate has been 7.00% since Sept. 17, according to Fed data. Prime moves with the Fed's target, so an October hike would take it to 7.25%, adding about $625 a year, or about $52 a month, on a fully drawn line. Two hikes would double that to about $1,250 a year.

The practical difference between the two groups: a floating-rate borrower pays only if the Fed actually moves, while a borrower about to fix a rate is paying for the market's expectations today, whether or not the hikes happen.

What traders are watching

• The Treasury's official closing yields tonight, and whether the five-year prints at or above 5%.
• Initial jobless claims Thursday, forecast at 201,000, per our calendar.
• The Oct. 2 jobs report and the Oct. 14 CPI, the last two major readings before the Oct. 27-28 meeting.

IBD also reported that the Treasury kept a $6 billion ceiling on its buybacks of older long-term bonds despite the jump, a sign it is not trying to lean against the move. Chart: 10-year T-note. More: Fed and rates.

Sources: CNBC; CNBC; CNBC bond quotes at 1:55 p.m. ET; U.S. Treasury daily yield curve; FRED bank prime rate and 5-year Treasury history; Investor's Business Daily. Payment figures are our calculations with illustrative rates. Intraday yields change quickly. This is market information, not investment advice.