The consensus read on the US long bond yield surge is that markets are repricing growth optimism. The data underneath that story is less comfortable: what is being priced is not just growth, but a simultaneous tightening of supply, an acceleration of costs, and a labour market running hot enough to make the Federal Reserve’s task considerably harder.
What the PMI Actually Shows About the US Long Bond Yield Surge
The S&P Global US Flash PMI Composite Output Index rose from 56.0 in August to 58.4 in September, the fastest expansion since July 2021 and the fourth successive monthly acceleration. Services drove the headline, recording the steepest rise in output for over five years, while manufacturing output growth also picked up to its quickest pace since April 2022. On the surface, that is a bull case for equities. On the surface.
Look past the output numbers and the picture turns. Supply chain delays in September were the most widespread since July 2022. Backlogs of work rose at an increased rate. Suppliers’ delivery times lengthened markedly. These are not the characteristics of a smoothly expanding economy absorbing demand. They are the characteristics of an economy pressing against its own capacity limits, and capacity limits, historically, mean pricing power.
That pricing power is already showing up in costs. Average input costs across goods and services surged in September, with the overall rate of input cost inflation hitting the highest since October 2022. Service sector input cost inflation specifically reached the highest since November 2022. The increase was attributed widely to higher fuel and transport costs, though wage pressures were also noted. In manufacturing, high raw materials prices were frequently linked to supply shortages.
The Labour Market Detail the Bond Market Is Weighing
Payroll growth in September hit the highest for over four years as companies sought to meet strong demand, according to S&P Global’s Flash PMI release. That single data point is worth sitting with. Four years of payroll growth history puts the current pace above anything seen in the post-reopening normalisation period. It is not a residual from pandemic distortions; it is a fresh acceleration.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, put the growth rate in explicit terms: historical comparisons from the survey data point to annualised growth of around 5%, with a 4% gain signalled for the third quarter as a whole. He also noted that firms’ input costs jumped in September at the steepest rate for four years, with fuel and transport costs spiking on the back of rising oil prices, adding that this ‘will add further to the upward pressure on selling prices and inflation in the coming months.’
The consensus may be overweighting the growth signal and underweighting what Williamson himself described as ‘some of the most severe supply chain bottlenecks seen in the near-two-decade survey history if the pandemic is excluded.’ Bottlenecks plus hiring plus rising input costs is not a benign combination for anyone holding duration.
Where the Yields Stand
The bond market’s reaction to all of this has been blunt. The 30-year yield reached 5.41%, the highest since July 27, 2024, a level not seen for over 22 years. The 10-year reached 5.13%, the highest since July 12, 2007. Both figures suggest the market is not treating September’s PMI as a temporary blip, but as confirmation of a structural shift in the inflation and supply backdrop.
Mike Shedlock, writing at MishTalk, identified three conditions that could end the yield surge: a recession reducing demand, the AI boom ending, and the war in Iran concluding with supply chains returning to normal. He suggested it may take some combination of all three.
That framing is reasonable as far as it goes. The PMI data adds a fourth consideration that tends to get less attention: the feedback loop between rising input costs, expanding backlogs, and increasing pricing power among firms. Selling price inflation did pick up in September. It was muted somewhat by competition in parts of the service sector, and the overall September selling price rise remained below the rates recorded between March and July. But the direction of travel on costs and capacity constraints points to that gap narrowing. The US long bond yield surge may have less to do with growth optimism than with the market beginning to believe that inflation’s second chapter has already started being written.
The next Federal Reserve decision will arrive against a backdrop where S&P Global Market Intelligence data shows both supply constraints and cost pressures at multi-year extremes. A quarter-point move, as some commentators noted after the September data, looks increasingly difficult to defend as sufficient.
