10-Year U.S. Treasury Yield Hits 5.04%, Highest in 19 Years

Record High as Middle East Conflict Escalates and Oil Prices Surge
30-Year Treasury Yield Also Surpasses 5.40%
Widespread Expectations of Fed Rate Hike

The yield on the 10-year U.S. Treasury bond, which serves as a global benchmark interest rate, has surpassed 5.04%, reaching its highest level in 19 years. This surge is the result of a combination of factors, including renewed inflation concerns stemming from a sharp rise in international oil prices due to the escalation of the war involving Iran, increased corporate borrowing for investments in artificial intelligence (AI), and the large-scale issuance of U.S. government bonds. With the Federal Open Market Committee (FOMC) interest rate decision for September approaching, tensions in the global bond market are at their peak.

On the 15th (local time), the yields on 10-year and 30-year US Treasury bonds surged to 5.041% and 5.401%, respectively, reaching the highest levels since 2007 before partially giving up some of the gains. Investing.com.

According to electronic trading platform Tradeweb on the 15th (local time), the yield on the 10-year U.S. Treasury rose to as high as 5.041% during the session, up 5 basis points (1bp = 0.01 percentage point) from the previous trading day. This is the highest level since July 2007, just before the onset of the global financial crisis. Having already broke the 5% mark during the previous session, it set a new high again in just one day.

The 30-year Treasury yield also surged as high as 5.401% during the session, marking the highest level since June 2007. The yield on the 2-year Treasury, which is sensitive to monetary policy, also rose above 4.65%. Rising bond yields mean falling bond prices.

Surge in International Oil Prices as the Direct Cause... Heightened Concerns Over Prolonged Inflation

The immediate cause of the sell-off in U.S. Treasuries is the sharp increase in international oil prices. This is due to concerns that military escalation in the Iran conflict and Gulf region could lead to further restrictions on oil supply. If energy prices rise, this is expected to be reflected in logistics costs and product prices, sparking worries over more persistent inflation.

In fact, the market is now largely expecting the Federal Reserve to raise its benchmark rate by 0.25 percentage points on the 16th. According to CME FedWatch, the federal funds futures market is pricing in a 92.7% probability that the FOMC will increase the benchmark rate from the current 3.50-3.75% to 3.75-4.00% at this meeting. Earlier this month, the probability was around 40%, but within just a few weeks, a rate hike has become widely accepted as a given. If realized, this would be the first rate increase since 2023.

Chicago Mercantile Exchange (CME)

There are warnings that if the FOMC outcome does not meet market expectations, long-term bond yields may rise even further. This would occur if the Fed chooses to hold rates steady, or even if it hikes rates, should Fed Chair Kevin Warsh show caution over the possibility of additional increases. According to Bloomberg, investors may demand higher yields on long-term bonds as compensation for inflation risk.

BMO Capital Markets strategist Bail Hartman commented, "It will be extremely difficult for the Fed to hold rates steady this week without undermining its credibility on inflation response," adding, "The market is vulnerable not only to an unexpected hold, but also to a 'dovish hike' that emphasizes patience via the dot plot or at a press conference."

Beyond Oil Prices: AI Investment and Fiscal Deficit Also Pushing Yields Higher

There are also structural factors behind the rise in long-term yields, aside from international oil prices. Major technology companies have been issuing more corporate bonds to raise funds for large-scale capital investments such as AI data centers and semiconductor facilities, flooding the bond market with additional supply.

Increased issuance of U.S. Treasury bonds by the federal government is also contributing to the pressure. The U.S. government continues to expand bond issuance to refinance maturing debt and offset its massive fiscal deficit. Meanwhile, Bloomberg reports that global central banks are not purchasing bonds in large volumes as they did during quantitative easing.

Indeed, in the auction for 20-year Treasuries held on this day, the highest yield recorded since this tenor was reintroduced in 2020 was set, but demand still fell short of market expectations.

Phoebe White, head of U.S. rates strategy at UBS, noted, "There are no signs of a weakening real economy, and the supply-demand structure of the Treasury market is significantly different from 2007, so there is limited room for long-term yields to fall." She added, "In particular, the demand for U.S. Treasuries from foreign public institutions has become considerably weaker than in the past."

Bessent: "It's Because of Global Issues"... Points to External Factors for Spike in Yields

U.S. Treasury Secretary Scott Bessent has recently attributed the surge in bond yields to global factors rather than domestic U.S. issues.

Prior to a House Financial Services Committee hearing, he told reporters that the increase in yields was "because of global issues," and emphasized, "The performance of the U.S. Treasury market is the best in the world." However, he did not elaborate on the specific global factors pushing yields higher.

Previously, the U.S. Treasury expanded the buyback limit for 10- to 20-year Treasuries this month from USD 2 billion to up to USD 6 billion to stabilize the long-term market. However, with the 10-year yield surpassing 5% even after the buyback, analysts believe that buybacks alone are unlikely to ease upward pressure on yields.

This content was produced with the assistance of AI translation services.