On Friday, September 25th, US Treasury yields remained in a consolidation range after a sharp rise this week. The yield on the 10-year US Treasury bond continued to trade around 5.18%, having briefly touched its highest level since 2007; the yield on the 30-year US Treasury bond was around 5.47% on the same day. The yield on the 10-year German bond rose to approximately 3.55% to 3.58%, and the yield on the 10-year UK bond rose to approximately 5.34% to 5.38%, with global long-term interest rates moving in tandem. On September 16th, the Federal Reserve raised the target range for the federal funds rate by 25 basis points to 3.75% to 4.00%, the first rate hike since July 2023. The US July PCE year-on-year growth was 3.7%, and the core PCE year-on-year growth was 3.3%, both significantly higher than the 2% target; the August PCE will be released on September 30th. Nominal growth, supply pressures, and changes in the buyer structure are the main drivers of this round of long-term interest rate repricing.

Inflation and nominal growth repric the term premium

Long-term interest rates are not isolated technical fluctuations, but rather the result of the combined pricing of inflation path and nominal output. The US July PCE year-on-year growth remained stable at 3.7%, while core PCE was 3.3%. Energy prices have a ripple effect on the overall index, but the core reading, excluding food and energy, is still significantly higher than the target, indicating that pressure comes not only from oil prices. Tariffs contribute a limited, but not zero, contribution to inflation. If diesel export restrictions are implemented, they will first raise global refined oil costs, then be passed on to domestic US prices; this is an additional variable at the policy level, not a certainty already priced in. The nominal level is more direct. The year-on-year growth rate of US GDP, calculated at current prices, is expected to be around 6.56% in the second quarter of 2026. Historically, the 10-year US Treasury yield is often about 1 percentage point lower than the nominal growth rate; using this rough framework, long-term interest rates above 5% do not seem abrupt. The annualized rate of US real GDP in the second quarter was about 1.5%, and in the first quarter about 2.1%, with private demand and equipment investment still supporting the overall figure. Capital expenditure on AI-related data centers is the most prominent component of corporate investment. With demand not contracting significantly and supply not experiencing sufficient easing to quickly bring inflation back to target, term premiums are likely to be repriced.

The linkage between short-term and long-term ends after the policy credibility is enhanced

Federal Reserve Chairman Kevin Warsh took a firm stance at the Jackson Hole symposium: the 2% PCE target is fixed; "Price stability doesn't happen automatically, and inflation doesn't necessarily mean-revert. Delivering price stability is the Fed's responsibility." He also outlined operational standards: "We must be certain that underlying inflation is clearly moving toward our target at a sufficiently rapid pace, otherwise there is still work to be done." The September 16 statement was equally straightforward: economic activity is expanding at a solid pace, inflation remains high, and this rate hike "will help us get back to our 2% target more quickly," and "The Committee will deliver on its promise of price stability." The median dot plot shows that policymakers' median expectation for the appropriate interest rate at the end of 2026 is around 4.1%. The labor market provides the context for this framework, not the opposite story. The U.S. unemployment rate remained at 4.1% in August, nonfarm payrolls increased by 162,000, and the labor force participation rate rebounded to 61.6%. The fact that employment did not weaken out of control undermines the narrative that "policy must immediately shift to easing." A rise in short-term policy rates will first change funding costs and refinancing conditions; long-term rates will simultaneously absorb inflation stickiness, nominal growth, and fiscal supply. The two can move in the same direction, or they can diverge due to a separate widening of the term premium.

Both the supply structure and the buyer structure are thinning.

The fiscal balance sheet dictates that the supply of US Treasury bonds will not suddenly decrease. The US deficit remains high, and the net supply pressure corresponding to the scale of subsequent auctions objectively exists. Corporate bonds issued by tech giants for data center construction will also compete for the same long-term funding in both the credit and Treasury markets. This Wednesday's five-year Treasury auction saw a high yield of 5.033%, the highest since June 2006, with weak demand and secondary market selling amplifying the day's volatility. Changes in the buyer structure are more crucial than supply figures. Research from the Federal Reserve Bank of New York indicates that the US Treasury market is becoming increasingly price-sensitive due to a decline in the proportion of price-insensitive foreign official buyers and an increase in the proportion of price-sensitive hedge funds and other private buyers. Model calculations show that under the current holding structure, an increase of $100 billion in US Treasury supply corresponds to an approximately 3 basis point increase in the five-year yield; however, if highly volatile buyers such as households and hedge funds were to sell $500 billion, the impact on the five-year yield could be significantly greater than a similar reduction by foreign official buyers. As marginal buyers shift from "official allocation accounts" to "leveraged trading accounts," the market's way of absorbing shocks changes from "a small price adjustment is enough to complete the turnover" to "a larger change in yield is required to clear out the market."

Liquidity vulnerability when leveraged buyers exit

Hedge funds have become an undeniable marginal force in the US Treasury market. Large hedge funds' long positions in US Treasuries have risen to approximately $2.4 trillion, with a combined long and short position of about $4.0 trillion, representing about 8% of outstanding US Treasuries; repurchase financing has also expanded. Basis trading between spot and futures contracts remains a significant source of long positions. Under normal circumstances, flexible buyers can suppress the yield's response to supply shocks; however, once these buyers themselves are harmed and forced to deleverage, market flexibility will suddenly decrease, and the same size supply or demand shock will correspond to greater yield volatility. The speed of the rise in long-term interest rates on September 23 already showed signs of passive position reduction. During the escalation of conflicts in the Middle East, hedge funds experienced similar pressure on short-term interest rates in the UK and Europe; this week, the pressure has shifted to US Treasuries. The New York Fed's statement is clear: the market will suddenly become less flexible after the absence of highly flexible investors. This is a structural problem, not a single day's sentiment.