The 10-year US Treasury yield rose to the highest in almost two decades, the latest milestone in a bruising global bond selloff driven by surging energy prices, mounting debt and inflation.
The yield on the global bond benchmark rose as much as five basis points to 5.04% on Tuesday, surpassing a peak from 2023 to hit the highest since 2007. The latest leg of the move followed an increase in global oil prices as risks to Middle East supplies grow.
The bond slump raises the stakes ahead of the Federal Reserve’s interest-rate decision on Wednesday, where investors expect officials to raise short-term borrowing costs for the first time since July 2023. If they don’t hike, or if Fed Chairman Kevin Warsh signals less monetary tightening in the coming months than what’s priced in by money markets, bond investors may demand even higher yields to protect against inflationary risks.
“It would be very difficult for the Fed to leave rates unchanged this week without eroding its inflation-fighting credibility,” said Vail Hartman, a strategist at BMO Capital Markets. “The market is vulnerable to not only an unexpected hold, but also a dovish hike that entails a more patient takeaway from the dot-plot or press conference.”
Bond yields have been rising globally since the US and Israel launched an assault on Iran in late February, disrupting the supply of Middle Eastern oil and gas. That’s on top of other factors such as massive corporate borrowing to fund artificial intelligence spending, which is both flooding markets with debt and pumping stimulus into an already resilient US economy.
It also comes as the amount of debt governments issue continues to rise, both to refinance maturing bonds and to fund deficit spending. Central banks are no longer hoovering up government bonds as part of their quantitative easing programs, and demand from other traditional buyers is cooling – resulting in a greater reliance on more price-sensitive investors.
“The scope for long-end yields to fall is somewhat limited given that we don’t see signs of weakness in the real economy and supply/dynamics in the Treasury market are very different relative to 2007,” Phoebe White, head of US rates strategy at UBS Group AG, said via email. “Structural demand for US Treasuries, particularly among foreign official investors, is materially weaker.”
A Bloomberg gauge of returns on Treasuries has declined 1% since the start of the month, and is down about 1.5% this year.
Around a third of fund managers surveyed by Bank of America Corp. identified a disorderly rise in bond yields as the biggest “tail risk” to the market, ahead of an AI bubble or second wave of inflation.
The drop in US government bonds is part of a broader global move that’s seen Germany’s 10-year yield rise to the highest since 2009, while Australia’s equivalent rate touched a 15-year high.
Bonds in Japan also retreated after it was reported that the authorities are considering a new mid-term defense spending target of 3.5% of GDP in line with NATO and other US allies. Earlier, a sale of 20-year debt recorded strong demand as elevated yields underpinned buying.
Japan’s potential additional defense spending is likely to worsen the pressure on global bonds, according to Westpac Banking Corp.
“A Fed hike and the ongoing move higher in oil will take US yields higher again, and the flirt with 5% in the Monday session should be seen as the norm rather than the exception,” said Martin Whetton, head of financial markets strategy at Westpac.
What Bloomberg’s Strategists Say:
“Long-end Treasuries are on fragile footing ahead of this week’s Fed decision, with the 10-year term premium sitting below where it started the year. While oil prices hold the swing vote on the direction of travel for US yields in the near term, troubling fiscal deficits and intensifying competition for capital mean any rally in longer-dated bonds will be short-lived.”
– David Savage, Macro Strategist.
In the US, the rise in the 10-year rate is particularly important because it serves as a baseline to price other loans such as mortgages. That makes its rise a headache for President Donald Trump ahead of mid-term elections, with Treasury Secretary Scott Bessent having previously said that lowering 10-year yields was a key goal of the administration.
Tuesday’s selloff is the latest assault by bond bears of the 5% level, a closely-watched threshold. Such round numbers are often seized on as key pivot points that can catalyze decisions by investors and policymakers.
While it moved above the threshold for a matter of hours on Oct. 23 2023 and again on Monday, the 10-year yield hasn’t closed above that level since 2007. Investors in other asset classes may be tempted to lock in 5% annualized returns for the next decade, potentially diverting cash away from the stock market.
“Through 5%, it starts to get worrisome for risk assets,” said Jesse Marre, a senior portfolio manager at Hilbert Group.
The worry for bondholders is that there aren’t enough dip buyers to quell the jump in rates, perhaps because energy prices keep rising or should the Fed disappoint. In that scenario, the cost of borrowing for the US government – and by extension anyone seeking US dollars – could enter a trading range not seen in a generation.
“Could things get even more sinister? Yes, where a break above 5% on the 10-year yield does nothing more than bring 6% into focus,” said Padhraic Garvey, head of research for the Americas at ING Groep NV. “Such a journey from 5% to 6% would be a far tougher one for the wider market to stomach.”
