A global bond selloff pushed U.S. 10-year Treasury yields near the closely watched 5 percent level on Friday as inflationary fears stemming from oil prices surging well beyond US$100 (HK$780) a barrel and rising odds of a near-term U.S. rate hike rattled investors.
With borrowing costs from Tokyo and Sydney to New York and London at multi-decade highs, investors are pricing in the need for interest rate increases to tackle price pressures due to the more than six-month long war in the Middle East.
The European Central Bank raised rates on Thursday and warned price pressures could prove lasting, while data showing U.S. producer prices increased in August stoked wagers of an imminent rate hike when the Federal Reserve meets next week.
Ballooning government borrowing across developed markets has also become a persistent source of concern, with investors demanding greater compensation to hold sovereign debt.
Sovereign yields serve as a reference point for asset prices across financial markets, and this higher price of money means steeper mortgage rates for consumers and tougher spending choices for governments as debt costs climb.
"We're seeing a perfect storm of higher oil prices, more inflation fears, central bank hawkishness and ongoing concerns over fiscal deficits all combining to push global yields higher," said Mansoor Mohi-uddin, chief macro strategist at Bank of Singapore.
"If tonight’s consumer price data is strong then 10-year Treasury yields will likely break 5.00 percent," he said, referring to eagerly anticipated U.S. CPI data later on Friday.
A sustained break for 10-year Treasuries above 5 percent is seen by some analysts as a critical line that could make bonds more competitive with stocks, potentially pulling dollars out of equity markets.
Higher Treasury yields also flow through to the broader economy through costlier mortgages, auto and consumer loans, and more expensive corporate and municipal borrowing.
10-YEAR YIELD JUST SHY OF 5%
Yields on 10-year Treasury notes rose to 4.97 percent in early Asian hours, trading at their highest levels since late 2023 and keeping investors nervous about the possibility of a jump beyond 5 percent, a level briefly breached three years ago.
Asian bonds extended the global selloff, with Australia's three-year government bond yields surging 18 basis points to a 15-year high of 5.047 percent.
Japan's 10-year government bond yields rose 6 bps to 2.97 percent, with the Bank of Japan widely expected to raise rates to a 31-year high next week and possibly signal faster tightening in the future.
In Europe, Germany's bund futures slipped 0.22 percent near their lowest since 2011, while French OAT futures fell 0.3 percent to a record low.
Prashant Newnaha, senior rates strategist at TD Securities, said 10-year yields above 5 percent are inevitable the longer oil sustains above US$100, noting the August inflation data is "setting up as the most important print for the Fed and markets so far this year."
"A soft print and no hike next week should drive a kneejerk move lower in yields. However, it's unlikely to sustain unless oil prices move lower as well," he said.
SURGING OIL PRICES DOG POLICYMAKERS
Brent crude futures surged to a four-month high of US$109.97 a barrel, set for about a 13 percent weekly jump, as increasing attacks along key shipping routes in the Middle East fuel fears of a prolonged disruption to supplies.
The sharp rise in oil prices and simmering price pressures have shifted investor expectations from the U.S. central bank. Traders are pricing in a 72 percent chance of a Fed hike next week, up from 49 percent a week earlier, the CME FedWatch tool showed.
The 2-year note yield, which typically moves in step with interest rate expectations for the Fed, hit its highest level since July 2024 at 4.596 percent on Friday after jumping 12 bps in the previous session.
The bond selloff also deepened after the U.S. government said it bought back US$5.2 billion worth of bonds in its latest buyback operation meant to support market liquidity, less than the US$6 billion cap and only half of the US$10.5 billion in bonds offered in the operation.
Rising Treasury bond yields would likely start to attract fixed-income investors, said Tina Teng, market strategist at Moomoo ANZ in Auckland.
"These yields are very high," she said. "There might be an opportunity now," she added. "There could be a reversal of this trend coming soon."
Reuters
