On Friday during Asian trading hours, a global bond sell-off continued to escalate, with the yield on the 10-year US Treasury note approaching the crucial 5% level that the market is closely watching. International oil prices surged past $100 per barrel, inflation concerns continued to rise, and bets on a US interest rate hike continued to climb, putting significant pressure on investor sentiment under the combined impact of these two factors. From Tokyo and Sydney to New York and London, borrowing costs in major global economies climbed to multi-decade highs. This dramatic volatility in the global bond market not only affects the pricing of major asset classes but will also have a ripple effect on the real economy, including residential mortgages and corporate financing.

Global central banks are shifting their stance, and fiscal deficits are exacerbating selling pressure in the bond market.

On Thursday, the European Central Bank raised interest rates and warned that inflationary pressures may be persistent. Meanwhile, the rise in the US PPI in August further strengthened market expectations that the Federal Reserve would initiate a rate hike at its policy meeting next week. In addition to tightening monetary policy, the continuously expanding government debt of developed economies is also a persistent threat to the bond market. Investors demand higher returns to continue holding sovereign bonds, directly pushing up government bond yields. Sovereign bond yields are the benchmark for global asset pricing; rising funding costs mean higher mortgage interest rates for residents, increased debt interest payments for governments, and more difficult choices regarding fiscal spending. Mansoor Mohi-uddin, chief macro strategist at Bank of Singapore, said that high oil prices, inflation concerns, a hawkish central bank stance, and concerns about fiscal deficits have created a perfect storm, jointly pushing up global bond yields. He stated that if the US CPI data released Friday evening is strong, the 10-year US Treasury yield is likely to break through the 5.00% mark. Many analysts believe that once the 10-year US Treasury yield stabilizes above 5%, bonds will become more attractive than stocks, and funds may flow out of the stock market and into fixed-income assets. The rise in US Treasury yields will also have a broad impact on the real economy, pushing up financing costs for mortgages, auto loans, businesses, and local governments.

Bond markets in many countries weakened simultaneously, with the 5% yield level of US Treasury bonds becoming the focus of the market.

In early Asian trading, the yield on the 10-year U.S. Treasury note rose to 4.97%, its highest level since the end of 2023, with the market highly wary of a potential breach of 5%, a level briefly touched three years ago. Asian bonds followed global trends and experienced a sell-off, with the yield on the 3-year Australian government bond rising 18 basis points to a 15-year high of 5.047%. The yield on the 10-year Japanese government bond rose 6 basis points to 2.97%, with the market widely expecting the Bank of Japan to raise interest rates to a 31-year high next week, or even signal faster tightening policies. European markets were also under pressure, with German government bond futures falling 0.22%, nearing their lowest level since 2011; French OAT futures fell 0.3%, hitting a record low. Prashant Newnaha, senior interest rate strategist at TD Securities, said that if oil prices continue to remain above $100, a break above 5% in the 10-year U.S. Treasury yield will be difficult to avoid, and the U.S. August inflation data is the most important set of data for the Federal Reserve and global markets this year. He stated that if the CPI data is weak and there is no interest rate hike next week, the yield on US Treasury bonds will decline briefly, but as long as oil prices remain high, this downward trend is unlikely to continue.

Oil prices are driving up inflation expectations, significantly increasing the probability of a Federal Reserve rate hike.

Brent crude futures rose to a four-month high of $109.97 per barrel, with a weekly gain expected to be close to 13%. The increasing number of attacks on key Middle Eastern shipping routes has fueled market concerns about a prolonged disruption to oil supplies, driving prices higher. The surge in oil prices and persistent inflationary pressures have fundamentally altered market expectations for Federal Reserve policy. Data from the CME FedWatch Tool shows traders pricing in a 72% probability of a Fed rate hike next week, compared to just 49% a week earlier. The 2-year Treasury yield, which is highly correlated with Fed rate expectations, rose to 4.598% on Friday, its highest level since July 2024, after rising 12 basis points in the previous trading session. The latest bond repurchase operation by the US Treasury also exacerbated the bond market sell-off. This repurchase operation, valued at $5.2 billion, fell below the $6 billion cap and was only half of the total bid size of $10.5 billion. Tina Teng, a market strategist at Futu ANZ in Auckland, stated that current US Treasury yields are already very high, the attractiveness of fixed-income assets is increasing, and the market trend may soon reverse.

Conclusion

The global bond market is currently facing a complex environment intertwined with inflation, geopolitical conflicts, fiscal pressures, and central bank tightening policies. The 5% yield on the 10-year US Treasury note is a highly symbolic and crucial level; a decisive break above it would reshape the asset pricing logic of global stocks, bonds, and currencies. The continued surge in Brent crude oil prices is increasing inflation stickiness, and expectations of a Fed rate hike are rapidly rising, leading to a simultaneous weakening of government bonds in Asia and Europe. The upcoming US CPI data will be a watershed moment for the short-term market: if inflation exceeds expectations, US Treasury yields may rise above 5%; if inflation falls, short-term pressure on the bond market will ease, but the long-term impact of high oil prices will remain, and the global high-interest-rate environment will continue to test the resilience of national economies. 10-year US Treasury yield daily chart. Source: EasyTrade. At 14:42 Beijing time on September 11, the 10-year US Treasury yield was 4.953%.