NEW YORK – The US 10-year Treasury yield surpassed 5 per cent for the first time since 2023 on Sept 14, as mounting inflation angst collided with swelling government and corporate borrowing needs.
The yield, a benchmark for US mortgage loans and bonds globally, rose almost 5 basis points to as high as 5.01 per cent, before paring much of the increase as buyers emerged.
“The 5 per cent mark in 10-year rates is clearly a key psychological level for investors – a point at which some may have earmarked for buying a dip,” said Molly Brooks, US rates strategist at TD Securities.
The initial jump came after surging crude prices raised concern about inflationary pressures in the countdown to this week’s Federal Reserve decision. The tenor’s yield last breached the 5 per cent level in October 2023, and only for one day.
Bond prices fell globally on Sept 14, with UK and German debt sliding as Brent crude approached US$110 (S$139) a barrel. With the rise in energy prices showing little sign of easing, investors are watching whether 5 per cent will again prove a line in the sand for 10-year Treasuries, as happened three years ago.
While the yield pulled back to around 4.99 per cent as of about 4.10pm in New York (4.10am on Sept 15, Singapore time), sentiment remains fragile. At one point, BlackRock’s iShares 20+ Year Treasury Bond ETF, the largest fund focused on long-duration US Treasuries, touched its lowest intraday level since its 2002 launch.
The rise in the US 10-year yield threatens to slow economic growth and weigh on equities that are trading at lofty valuations. This has prompted US Treasury Secretary Scott Bessent, who has made long-term borrowing costs a key measure of the administration’s success, to boost bond buybacks, encourage Japan to curb Treasury sales and open the door to potentially cutting long-maturity debt issuance.
Little effect
None of it has had much effect. In fact, the sell-off has only been quickening of late, with 10-year yields heading for their seventh month of increases, matching the longest monthly climb since 2011.
Less than two months before the US midterm elections, the 10-year yield is now roughly a full percentage point above its level before the outbreak of the Iran war. The conflict has sparked a surge in oil prices, adding to inflation worries. Those concerns were reinforced by hotter-than-expected consumer-price data for August, prompting traders to boost bets on Fed interest-rate hikes starting as soon as Sept 16.
But the sell-off also reflects deeper structural forces that have pushed up long-dated yields across major developed markets, with a gauge of global government borrowing costs rising to levels last seen in 2007. Investors are demanding greater compensation to hold long-term debt as governments and companies compete for capital amid widening fiscal deficits and a flood of issuance to fund artificial-intelligence infrastructure.
“There are a lot of underlying factors that make for a sustained selloff in rates as the path of least resistance for now,” said Zach Griffiths, head of investment-grade and macro strategy at research firm CreditSights. Ten-year yields could rise toward 5.5 per cent, he said.
The Treasury market has ballooned to about US$32 trillion from around US$4.5 trillion since 2007, pushing the federal debt to more than 100 per cent of US gross domestic product. Fitch Ratings warned in August that the country is “vulnerable to future economic shocks” as debt levels grow.
‘Persistent pressure’
The last time the 10-year yield topped 5 per cent, in October 2023, it closed below the milestone that day. Buyers quickly pounced then as the US labour market cooled and inflation eased, allowing the Fed to end its most aggressive tightening campaign in decades. By September 2024, the Fed began to cut rates.
This time, a resilient labour market has kept investors focused squarely on inflation and the prospect that borrowing costs will remain higher for longer. Treasuries are now on course for their first annual loss since 2022.
It’s “very hard for the market to be bullish duration given the persistent pressure from the energy complex and the fact that yields have been grinding higher for months”, said Izaac Brook, rates strategist at RBC Capital Markets. “I do think the 5 per cent level will bring buyers in – you can see a bit of a bounce right now. But the rates market is still at the mercy of what’s happening in the Middle East.”
So far, the bond sell-off has remained largely orderly, with volatility well contained. A sizeable short rates volatility position is emerging in the Secured Overnight Financing Rate options market, where a trader or several traders spent more than US$100 million in premium to bet that interest-rate swings will decline.
But Bessent has made clear his unease with the relentless rise in long-term borrowing costs. The former hedge fund manager has taken several unconventional and sometimes controversial steps aimed at bringing down yields, including opening the door, in traders’ minds, to reducing long-term debt issuance and taking measures seen as easing pressure on Japan to sell Treasuries.
In August, Bessent surprised markets by announcing plans to supersize the buybacks of longer-dated debt, from the originally scheduled US$2 billion cap. But his subsequent unveiling of a plan to buy as much as US$6 billion of longer-maturity securities in September was deemed still insufficient to have a lasting impact. Bessent has framed his goal as to slow moves, instead of altering the “equilibrium” of bond prices.
Wednesday focus
The surge in yields raises the stake for the Fed’s policy announcement on Sept 16. Interest-rate swops show that traders see a greater than 90 per cent chance that Fed Chairman Kevin Warsh and his colleagues raise borrowing costs this week, which would be the central bank’s first hike since 2023.
“If they don’t hike, it’s going to be pandemonium,” said Ed Al-Hussainy, a portfolio manager at Columbia Threadneedle. In that scenario, long-term bond yields will surge as inflation risks mount, he said.
For his part, he said he’s looking to buy around these levels.
“We are looking for opportunities to add, but it’s not going to be today,” he said. “It takes some time and confidence.” BLOOMBERG
