The months-long sell-off in US Treasuries is teetering on the brink of disaster. The 10-year Treasury yield is nearing the critical 5% mark, while the 30-year yield has hit a 19-year high. Soaring oil prices, persistent inflation, and Trump's promise of over a trillion dollars in stimulus checks are creating a triple whammy, pushing the probability of a Fed rate hike in September to 72%. The anchor of global asset pricing is swaying violently, increasing the risk of a simultaneous collapse in both stocks and bonds. Market attention is focused on Friday's CPI and next week's interest rate decision.

I. Bond Market Storm Escalates: 10-Year Yield Hits New High Since Financial Crisis

The months-long sell-off in U.S. Treasuries is teetering on the brink of disaster. On Thursday, the 10-year Treasury yield closed at 4.943%, having touched 4.965% intraday, nearing the key psychological level of 5%, marking its highest closing level since October 2023. On Friday in Asian trading, it briefly reached 4.974%. The 30-year Treasury yield jumped 8 basis points to 5.37%, breaking through 5.35% intraday, a new high since 2007. The more monetary policy-sensitive 2-year yield surged 16 basis points to 4.59%, its largest single-day gain since the tariff storm in April 2025. Since late June, bond yields have climbed relentlessly, ignoring Treasury Secretary Scott Bessant's efforts to curb the rise by increasing government buybacks of long-term debt. The U.S. Treasury debt has surpassed $40 trillion, and the annual fiscal deficit is projected to exceed $2 trillion by the end of the fiscal year on September 30. Against this backdrop, the 10-year yield is about 115 basis points higher than the effective federal funds rate, and the large term spread reflects deep market concerns about long-term inflation, fiscal deficits, and debt sustainability.

II. Three Driving Forces Combined: Soaring Oil Prices, Higher-than-Expected PPI, and Concerns About Fiscal Deficits

This round of bond market sell-off was triggered by a triple whammy of negative factors. Oil prices were the core catalyst. The escalating US-Iran maritime conflict saw the US destroy five Iranian oil tankers, while Iran claimed responsibility for attacks on several US ships and tankers. Brent crude oil prices surged 6.3% to $107.63 per barrel in a single day, further rising to $109 in after-hours trading, its highest level in nearly four months. An OPEC report showed that Saudi Arabia's daily production in August was only 6.2 million barrels, a sharp drop of 23% from July, further exacerbating supply-side tensions. PPI data added fuel to the fire. Data released by the US Bureau of Labor Statistics on Thursday showed that the Producer Price Index (PPI) rose 5.4% year-on-year in August, higher than the previous month's 4.7%, exceeding Wall Street expectations, with rising fuel costs being the main driver. This data directly reinforced the market's assessment that inflationary pressures remained stubbornly persistent. Trump's promise of "money printing" exacerbated deficit concerns. Speaking at the Republican National Convention in Dallas, Trump pledged to send $5,000 checks to all American adults if the Republicans win a majority in both the House and Senate in the midterm elections. According to multiple media outlets, the plan would cost between $1.2 trillion and $1.3 trillion, far exceeding the annual revenue of approximately $190 billion from tariffs, and could further exacerbate debt and inflationary pressures.

III. Bessenter's share buyback operation was met with a "vote of no confidence" from the market.

Faced with rising yields, Bessant announced last month that he would at least double the size of his repurchase operations of longer-term U.S. Treasury bonds, and on Wednesday further announced that he would set a repurchase cap of $6 billion for Thursday, three times the size of previous routine operations. However, Thursday's actual operation was surprising—the Treasury ultimately repurchased only $5.19 billion in Treasury bonds, below the $6 billion cap. For 10- to 20-year Treasury bonds, the repurchase not reaching the cap was unprecedented. The market reacted sharply. Analysts said the $6 billion operation was negligible compared to the approximately $40 trillion U.S. Treasury market and had little impact on the overall supply and demand dynamics that had driven yields sharply higher over the past three months. Jim Barnes, head of fixed income at Bryn Mawr Trust, pointed out that the Treasury's attempt to "proactively" lower long-term bond yields had unsettled investors, suggesting that the pressure on the U.S. Treasury market might be more severe than investors anticipated. Bessant himself subsequently argued that the U.S. Treasury market was in "excellent condition," describing market anxiety as "a bunch of meaningless noise," but this statement did not quell market concerns.

IV. Stock-Bond Linkage: Small-Cap Stocks Under Pressure, Funds Flow to Short-Term Bonds for Safe Haven

The surge in US Treasury yields has had a clear spillover effect on the stock market. On Thursday, the S&P 500 fell 0.6% to 7,591.70, marking its fourth consecutive day of decline; the Dow Jones Industrial Average dropped 316.56 points to 52,064.10; and the Nasdaq Composite fell 0.7% to 26,081.72. Sectors sensitive to interest rate changes were hit hardest. The Russell 2000, dominated by small-cap stocks, fell about 1% to 2,890.95, a significantly larger decline than large-cap stocks, reflecting the greater pressure of high financing costs on small and medium-sized enterprises. The S&P materials sector fell 1.5%, with only the energy sector among the 11 sectors of the S&P 500 bucking the trend and closing higher. Jay Hatfield, CEO of Infrastructure Capital Advisors, stated that rising US Treasury yields are undoubtedly detrimental to the stock market. It is worth noting that significant changes are also occurring within the bond market's internal fund flows. Data shows that in the 20 trading days ending September 8, US short-term Treasury ETFs attracted $12.2 billion in inflows, while medium-term bond ETFs attracted approximately $5.7 billion, and demand for long-term bond funds remained weak. This trend of "abandoning long for short" indicates that investors are actively reducing duration risk in an environment of rising interest rate uncertainty.

V. The Federal Reserve's Decision-Making Dilemma: Warsh's Hawkish Stance and the Key Test of CPI

All eyes are now on next week's Federal Reserve interest rate meeting. According to CME's FedWatch tool, the probability of a 25 basis point rate hike in September has risen to 71.3%, up from just 49% a week ago. Fed Chairman Kevin Warsh's speech at the Jackson Hole conference last month was interpreted as a clear hawkish signal. In his speech, he emphasized that "we must be confident that underlying inflation is moving toward our target at a clear and sufficiently rapid pace," leading the market to believe he has no other option but to raise rates this month to maintain the Fed's credibility, regardless of whether the economy needs it. Personal consumption expenditure inflation is currently at 3.7%, well above the Fed's 2% target, and the cooling trend since the end of 2024 has stalled. However, divisions remain within the Fed. Governor Christopher Waller stated last week that he would support keeping interest rates unchanged if the CPI report showed core prices rising 0.2% from the previous month, in line with economists' expectations. The August CPI report, released on Friday, will be a key catalyst in determining the policy direction in September. According to the Dow Jones Consensus forecast, the August CPI rose 0.4% month-on-month, with the annual inflation rate reaching 3.4%; the core CPI is expected to rise 0.2% month-on-month and 2.4% year-on-year. Ray Raimi, Vice President of Daiwa Capital Markets U.S., pointed out: "The bond market is very clear that the Fed will raise interest rates. The bond market will not wait for tomorrow's CPI data to make a decision."

VI. Borrowing costs rise across the board: Mortgage rates hit a one-year high

The continued rise in US Treasury yields is transmitting to the real economy through multiple channels. Freddie Mac reported on Thursday that the average interest rate for a 30-year fixed mortgage rose to 6.76% this week from 6.71% last week, the highest level since June 2025; the average interest rate for a 15-year fixed mortgage rose to 6.09% from 6.04%. Analysts point out that the 10-year Treasury yield is closely related to the interest rates of almost all forms of debt, including mortgages, student loans, and corporate bonds. Further increases in yields mean that borrowing costs for consumers and businesses will continue to rise. Data from the American Automobile Association shows that the average price of regular gasoline has risen to $4.22 per gallon, and the average price of diesel has reached $5.94 per gallon, representing increases of approximately 42% and 58% respectively compared to pre-war levels. The dual pressures of energy and financing costs are squeezing US consumers.

Editor's Summary

The current sell-off in the US bond market is the result of a confluence of geopolitical conflicts, fiscal expansionist impulses, and monetary policy uncertainty. Soaring oil prices have directly fueled inflation expectations, Trump's promise of over a trillion dollars in "money printing" has exacerbated market doubts about fiscal sustainability, and the reduced scale of the Bessant repurchase operation has weakened investor confidence in the government's ability to stabilize long-term interest rates. Unlike the rapid decline after the 10-year yield broke through 5% in October 2023, the current rise in yields is accompanied by more complex structural factors—a $40 trillion debt stock, persistent inflation, and internal divisions within the Federal Reserve, making the 5% mark potentially a new interest rate center rather than a temporary high. Next week's Fed interest rate decision and Friday's CPI data will be key turning points in determining market direction. (Daily chart of the 10-year US Treasury yield, source: EasyForex)

Frequently Asked Questions

Q: Why did the 10-year US Treasury yield approaching 5% cause such a large market shock? A: The 10-year US Treasury yield is considered an "anchor" for global asset pricing. Interest rates on almost all forms of debt, including mortgages, student loans, and corporate bonds, are closely related to it. 5% is crucial because it's only the second time this level has been reached since the 2008-09 financial crisis. Higher yields not only increase borrowing costs for consumers and businesses but also attract investors who might otherwise buy higher-risk assets like stocks to bonds, thus suppressing stock market valuations. Furthermore, with the current outstanding US Treasury bonds exceeding $40 trillion, even a small increase in yields can significantly increase government interest payments through debt refinancing. Q: Why did Trump's "$5,000 check" promise exacerbate the bond market sell-off? A: This promise is expected to cost over $1 trillion and requires congressional approval. The current annual US fiscal deficit is close to $1.8 trillion, and the federal government does not have a fiscal surplus to support such a large-scale cash handout. The market is concerned that this plan will further expand the scale of Treasury bond issuance, increasing bond supply and thus requiring higher yields to attract marginal buyers. Essentially, the market is pricing in the combined effect of "more Treasury supply + higher inflation expectations." Q: Why did Bessant's repurchase operation backfire? A: Bessant had repeatedly emphasized the necessity of expanding repurchases, which to some extent raised market expectations for this operation. However, the $6 billion size is negligible compared to the approximately $40 trillion US Treasury market and the annual issuance of over $2 trillion in Treasury bonds. What unsettled the market even more was that the actual repurchase amount was only $5.19 billion, below the $6 billion limit, unprecedented for 10- to 20-year Treasury bonds. The market therefore interpreted this as either the Treasury's limited capacity or its unwillingness to actively buy at current price levels—both disappointing scenarios. Q: How likely is a Fed rate hike in September? What factors mainly determine this? A: According to CME interest rate futures data, the probability of a 25 basis point rate hike in September has risen to 71.3%. There are two key variables: First, the August CPI data released on Friday. If the core CPI month-on-month increase exceeds the expected 0.2%, the probability of an interest rate hike may further increase. Second, the policy stance of Federal Reserve Chairman Warsh. Warsh released a clear hawkish signal at the Jackson Hole conference, stating that the personal consumption expenditure inflation rate is currently 3.7%, far above the 2% target, and the cooling trend of inflation since the interest rate cut cycle has stalled. However, some officials remain cautious, believing that more data should be waited for confirmation. Question: How is this round of bond market turmoil different from that of October 2023? Answer: In October 2023, after the 10-year yield broke through 5% intraday, it triggered a large amount of buying that day, and the yield fell sharply by 19 basis points, subsequently declining for two consecutive months. The background to this round of price increases is somewhat different: First, the ongoing military conflict between the United States and Iran is expected to continue, and oil prices will remain high for the foreseeable future, putting sustained pressure on inflation; second, the outstanding amount of US Treasury bonds has increased from approximately $33 trillion to over $40 trillion, making concerns about debt sustainability more prominent; and third, the 30-year yield did not experience a rapid decline similar to that in 2023 after hitting a 19-year high, indicating that the market's pricing logic for long-term interest rates may have undergone a structural change.