Bond speculators are pushing benchmark U.S. Treasury yields toward the closely watched 5 percent level ahead of U.S. inflation data that will shape expectations for a Federal Reserve interest rate hike next week, according to Bloomberg News.
The yield on 10-year bonds hits its highest level since 2023.
Indeed, the yield on the benchmark 10-year US Treasury note rose by about 20 basis points this week, trading just below the key psychological threshold of 5 percent. This level could attract bargain hunters, but it also carries the risk of a further sell-off that could spread to global markets. The yield reached approximately 4.95 percent during trading on Friday, its highest level since 2023 and approaching its highest point since 2007.
Inflationary pressures and high oil prices are fueling tensions.
The rise in yields comes as traders grapple with soaring oil prices and inflation rates that have exceeded the Federal Reserve's target for the first time in half a decade. The highly anticipated US Consumer Price Index (CPI) reading, due later today, is one of the most important data points in years, with traders currently pricing in a near 70% probability of an interest rate hike at the Fed's meeting scheduled for September 16.
In this context, Padric Garvey, head of Americas research at the Dutch ING Group, told Bloomberg News that the 10-year Treasury yield reaching 5 percent is now more of a certainty than a mere prediction, adding that these are worrying times for bond markets.
Short-term and long-term bond yields are rising together.
The yield on the two-year Treasury note, which is most sensitive to Federal Reserve interest rate moves, rose to 4.59 percent this week. The yield on the 30-year Treasury note also hit its highest level since 2007, attracting exceptional demand at a recent auction.
A global sell-off hits bond markets in Europe and Asia
These movements extended to bond markets around the world, with the yield on Germany's 10-year bond hitting its highest level since 2009 on Thursday, according to data released by the European Central Bank on inflation risks. Australian benchmark yields also reached levels not seen in over a decade on Friday, while comparable Japanese yields traded near the psychologically important 3 percent level.
New Zealand bonds were the worst performers, with the yield on two-year notes jumping 25 basis points. A global benchmark for bond yields reached its highest level since 2007.
Michael Tang, interest rate strategist at Commonwealth Bank of Australia in Sydney, told Bloomberg News that the decline in the US consumer price index and the Federal Reserve's interest rate hike are currently the only two circuit breakers that could halt this trajectory, otherwise no one would feel comfortable holding long interest rate positions, stressing that pessimistic monetary tightening sentiment is currently dominating the markets.
A cautious wait ahead of the inflation data release.
Traders are cautiously awaiting the most important economic event this week, especially since Federal Reserve officials have emphasized their focus on inflation in recent weeks. Molly Brooks, US interest rate strategist at TD Securities, believes that a higher-than-expected reading could reinforce market expectations of a rate hike in September, along with further monetary tightening later on.
According to a Bloomberg survey of economists, the core consumer price index, which excludes food and energy, is expected to rise by about 0.2 percent in August.
This report comes one day after the release of the Producer Price Index, which showed renewed pressures stemming from higher energy prices last month.
Breaking through the 5 percent barrier: A growing challenge for the US Treasury Secretary
The 10-year Treasury yield exceeding 5 percent poses a growing challenge to the $32 trillion Treasury market and to U.S. Treasury Secretary Scott Bisent, who is struggling to stem the sell-off in the bond market ahead of the midterm elections. According to data released Thursday, the Treasury purchased less than expected during its first large-scale repurchase of long-term bonds.
Bisent sought to allay concerns stemming from the recent sell-off, asserting that the Treasury bond market is in very good shape. He pointed to the strong performance of two auctions held in recent days and highlighted the outperformance of US bonds compared to their global counterparts. According to the Bloomberg Total Yield Index, US Treasury bonds have fallen 1.4 percent since the beginning of the year, compared to a 1 percent decline in the broader global index.
Andrew Tieshurst, senior interest rate strategist at Nomura in Sydney, said that the unconventional communications and actions from the US administration are worrying investors in the bond market, explaining that the underlying environment was already fragile due to high government debt burdens and huge financing needs.
Implications for mortgages and global markets
Yield movements affect the cost of capital for almost everything, including U.S. mortgage rates, a politically sensitive indicator for American voters ahead of the midterm elections, which have already hit their highest level in more than a year.
As the global benchmark for bonds, US Treasury yields serve as the reference price for debt markets worldwide, which are themselves under similar pressure. A break below 5 percent could be enough to trigger turmoil in equity markets as well.
According to John Higgins, chief economic advisor for financial markets at Capital Economics, some believe that the 5 percent level is a threshold beyond which financial markets could slide into collapse. He added that although he is not convinced that the 5 percent figure has such magical power, rising Treasury bond yields will certainly pose a risk to the sustainability of US public finances, in addition to threatening stock markets.
