The U.S. Treasury's 5 year note ended a $70 billion auction with a high yield of 5.033% on Tuesday as investors reacted to five year highs in business activity. Borrowing costs climbed across the yield curve after September’s composite PMI hit 58.4, the strongest expansion in more than five years, with manufacturing and services indices reaching 57.0 and 58.7. The 10 year Treasury note spiked to 5.081%, its highest level since July 2007, and the 2 year note hit a 27 month high of 4.79%.

Bond markets are now pricing a 68% probability of a Federal Reserve interest rate hike in October to counter rising inflation. Firm input costs jumped to their highest levels since 2022, driven by spikes in energy and transport expenses. This shift toward a more hawkish outlook increases financing costs for the government and sensitive assets, including mortgages and equities.