On Wednesday (September 23), the bond market reached another milestone. Fueled by strong data, the yield on the 10-year U.S. Treasury note surged 14 basis points to 5.12%, and the 5-year yield also climbed above 5% for the first time since 2007. But the "2007" label serves as both a warning and a misleading reference—this time, the engine of the surge is not inflation, but growth. I. PMI Ignites Yields The catalyst is clear. S&P Global's Purchasing Managers' Index (PMI) released Wednesday showed that the combined reading for US manufacturing and services reached its best level since the post-pandemic recovery, significantly outperforming market expectations. This data almost confirms all previous market judgments: an economic recession is now the least likely event, making last week's controversial Fed rate hike decision seem "correct." More noteworthy is the significant upward revision of market expectations for the end of tightening. At the beginning of this year, federal funds futures implied a 3% interest rate for October next year; now it has surged to 4.75%—"higher and longer" is becoming the new market consensus. Behind this is investors beginning to genuinely believe that growth will continue and interest rates will remain high. However, the most crucial factor is the "composition" of yields. This can be broken down by the spread between fixed income and TIPS (Treasury Inflation-Protected Securities): over the past five years, inflation parity has remained almost unchanged, while real yields have contributed all the gains. This is in stark contrast to the previous market concern about runaway inflation—negative real yields created the extreme easing of 2021, a situation that has now been completely reversed. In other words, this is not a panic sell-off, but an upward trend driven by "good" growth and a return to real funding costs. II. Government Deficit? The Market Doesn't Care Theoretically, rising yields should directly increase government borrowing costs, and last month the US fiscal deficit exceeded $40 trillion. However, paradoxically, related media coverage is low, and the market almost shrugs off the figure. The Institute of International Finance's (IIF) global debt monitoring report released at the same time perfectly explains this calm. Inflation has become a "friend" of governments worldwide—even with nominal debt repeatedly hitting new highs, inflation continues to erode the debt-to-GDP ratio, causing debt to "shrink" imperceptibly. Meanwhile, foreign demand for US corporate bonds and stocks remains strong, and while purchases of Treasury bonds are subdued, there has been no large-scale withdrawal; there is almost no evidence that the massive debt incurred for AI infrastructure has crowded out the Treasury bond market. Morgan Stanley's Vishvas Patkar and BNP Paribas' Gunnet Dingela put it more bluntly: the problem isn't "whether it can be issued," but whether the market capacity is sufficient; clients have already treated the deficit as a "known and priced-in" story, showing considerable indifference. Market consensus leans towards the view that as long as growth can be sustained, the deficit doesn't currently constitute a reason to sell government bonds. III. Risk Spillover While the market may remain calm for now, the risks won't disappear; they will only spread outwards along the "balance sheet" line. Domestically in the US, the Federal Reserve's tightening cycle is subtly altering the Treasury's financing structure—it is increasingly borrowing short-term Treasury bills, directly increasing the government's actual debt burden as interest rates rise. Political risks are also lurking: the market has clearly bet on a "blue wave" sweeping both houses of Congress; if policy-making loses coherence, the deficit could worsen, contradicting the traditional wisdom that "stalemate equals fiscal security." A more profound impact lies in its outward spread. Higher borrowing costs are particularly devastating for heavily indebted countries. The yield on Japan's 10-year government bonds surged 8.8 basis points to 3.04% at the open on Thursday, a 30-year high; on Wednesday, the yield on France's 10-year bonds jumped 15.4 basis points, while Italy's and Greece's rose 14.7 and 14.8 basis points respectively—the shadow of the 2010-2012 Eurozone sovereign debt crisis is gathering again over peripheral economies. IV. Emerging Market Reaction The other side of the rising government bond yields is the "rainy season" in emerging markets. The Federal Reserve's return to tightening has pushed emerging market currencies to their lowest points since March; the South African Reserve Bank was the first to follow suit by raising interest rates and increasing its inflation target, while Brent crude oil has returned above $100 per barrel, exacerbating the situation for net energy importers. For the developing world, interest rate hikes seem to be only a matter of time. Emerging market assets currently show resilience: hard currency sovereign bonds have offered competitive returns this year, with spreads even narrowing. HSBC and Robecaux are also optimistic – global expansion and investment-driven growth continue to support sovereign credit quality. However, the real test lies not in spreads, but in a strengthening dollar, which often inflicts real harm on holders of emerging market local currency debt. Even more concerning is the underlying concentration. The strong performance of emerging market stocks is highly concentrated in a few countries that have benefited from rising semiconductor and commodity (oil, base metal) prices; excluding Asia, their performance is roughly on par with developed markets (excluding the US, which excludes tech stocks), offering no advantage. Political risks, over-reliance on commodities, and weak consumer demand remain under intense scrutiny. Conclusion As for the US, this round of yield increases has not been "malicious" – it is a benign rise driven by growth and moderate inflation. But its destructive power won't stop in the United States: any country with poor fiscal standing—highly indebted developed nations, emerging markets reliant on imported energy—will suffer the consequences of higher global financing costs. The memories of 2007 are returning; this time, it's the same story of who has the weakest foundation.