Global bond markets are flashing a warning sign. Government bonds across major economies are under sustained selling pressure, and yields have climbed to levels not seen in decades. From Japan and Germany to Italy, the UK, and Australia, sovereign bond yields have surged to multi-year highs.
The 10-year US Treasury bond yield is nearing a breakout above 5% and is currently at 4.93%, after reaching an intra-day high of 4.98%. Investors will now react to the US CPI data for August; as of now, yields are lower than before the announcement.
The 10-year yield has already reached its highest level since October 2023. If the bond market continues to crack, it could even test the 20-year high of around 5.22%, last seen in August 2006.
What’s Driving the Selloff
A combination of rising oil prices, inflation fears, hawkish central bank policies, and ongoing fiscal deficit concerns is driving global yields higher.
Here’s why this happens: a government bond, issued by a national government in its own currency, reflects the yield investors require based on two things: expected inflation and the likelihood the debt gets repaid.
When inflation is expected to rise, bonds become less attractive to hold. Add a government’s weakening capacity to repay its debt, and investors grow even more cautious. The result: they sell, and they demand a higher risk premium to stay invested.
The 30-year yield has reached a 19-year high of 5.38%, a sign that investors are increasingly reluctant to hold long-dated securities.
Why Oil Prices Are Adding Fuel to the Fire
Rising oil prices are fueling expectations of a rate hike. Brent oil is trading above $106, up 20% in the past month. This surge has raised the stakes for the US consumer price data due in August, which could shape the Federal Reserve’s rate decision next week. The next FOMC meeting is on September 15-16.
Meanwhile, the ongoing conflict between the US and Iran continues to pose risks of extended disruptions to global energy supplies, adding to inflation concerns.
What Prices Are Telling Markets
The European Central Bank increased rates and indicated that price pressures may be persistent. Meanwhile, data revealing a rise in U.S. producer prices for August heightened expectations for a potential rate hike by the Federal Reserve in its upcoming meeting.
As traders await the latest US CPI data, Treasury yields also rose after data showed US producer inflation (the PPI index) increased in August, driven by the Iran war pushing up wholesale energy prices. Markets are now pricing in a 67.4% likelihood of a 25 basis point Fed rate hike next week, up from 61% before the PPI report.
The US CPI data for August is due today from the US Bureau of Labor Statistics. In July, US inflation rose by 3.4%, while core inflation was up 2.5%. The market expects August headline CPI to hold around 3.4%.
US Treasury’s Bond Buyback Falls Short
The US Treasury carried out its first expanded buyback operation on Thursday, and purchases came in weaker than expected. According to Trading Economics, the US government repurchased $5.2 billion worth of bonds, below the $6 billion cap and roughly half of the $10.5 billion on offer.
Rising yields carry a direct cost: a heavier interest burden on government debt. The US, carrying $40 trillion in debt, now faces an interest cost exceeding $1.27 trillion as of August 31.
The Bottom Line
Bond markets are sending a clear signal: inflation worries and fiscal strain are pushing yields higher across the globe. With US CPI data due today and a Fed decision just days away, the next move in yields, and whether the 10-year breaks past 5%, may hinge on what the numbers show.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. Readers should consult a financial advisor before making investment decisions.