On Tuesday, October 6th, the global long-term government bond market remained highly volatile. The previous trading day saw the US 10-year Treasury yield close at 5.31%, the 30-year at 5.70%, and the 10-year real yield at 2.95%. On October 6th, long-term yields declined somewhat, and Brent crude oil also returned to around $98 per barrel. US non-farm payrolls increased by only 29,000 in September, with the unemployment rate at 4.2%, but August's consumer price index (CPI) remained at 3.4% year-on-year, and the Eurozone's preliminary September inflation estimate rose to 3.8%. This combination suggests that the core of current bond market pricing is not simply "economic strength," but rather a simultaneous reassessment of inflation stickiness, policy interest rate path, fiscal supply, and risk compensation.

The rise in long-term yields cannot be attributed solely to inflation expectations.

The difference between the US 10-year nominal yield of 5.31% and the 10-year real yield of 2.95% is approximately 2.36 percentage points. This difference can serve as a rough reference for long-term inflation compensation, but it cannot be directly equated with forward inflation expectations. More importantly, the high real yield itself implies a significantly higher demand for real returns in the market. In other words, the current rise in long-term interest rates includes not only inflationary factors but also higher real interest rates and term premiums. This is why simply making a static comparison between the 10-year yield and the policy rate is insufficient. The far end of the yield curve simultaneously carries the average future short-term interest rates, inflation uncertainty, bond supply, liquidity, and fiscal risk compensation. These different components may offset each other or resonate at the same stage; therefore, changes in nominal yields themselves cannot directly tell the market which risk is dominant. The term premium itself cannot be directly observed, and different models may give different answers regarding its magnitude and even direction.

Policy interest rate path and energy shock together raise discount rate

On September 16, the Federal Reserve raised its target range for the federal funds rate by 25 basis points to 3.75% to 4.00%, while maintaining its assessment that "inflation remains high." By early October, weaker US employment data reduced the market probability of further short-term rate hikes, but the services price index rose to 74 in September, the highest since July 2022; Eurozone energy prices rose 18.8% year-on-year in September, pushing overall inflation to 3.8%. This means that while short-term policy expectations may fluctuate due to weaker employment, long-term expectations must still account for the risk that energy supply shocks may be transmitted to core inflation through transportation, production, and service prices. Crude oil is also an important connecting variable for long-term interest rates. Brent crude oil futures briefly broke through $100 per barrel in the third quarter, and spot prices were significantly higher in mid-September; prices fell back to around $98 per barrel on October 6, indicating that immediate supply concerns had eased, but the energy risk premium had not disappeared.

Fiscal supply and term premium are becoming increasingly important pricing factors.

Term premiums cannot be directly observed and can only be estimated using models. However, multiple studies point to the same direction: increased government bond supply and a declining proportion of traditionally low-price-sensitive buyers will increase the compensation required by private funds to absorb new debt. A September study estimated that for every $100 billion increase in US Treasury supply, the current 5-year yield rises by approximately 3 basis points. Fiscal constraints are also accumulating. The US federal deficit is projected to reach approximately $1.9 trillion in fiscal year 2026, representing about 5.8% of GDP. When high deficits coexist with high real interest rates, new issuances not only increase the duration the market needs to absorb but also raise future interest payments, making fiscal risk compensation more easily priced into long-term bonds. Changes in investor structure will also amplify volatility. The rising role of hedge funds in absorbing Treasury issuance helps provide liquidity, but their shorter financing terms and stronger leverage constraints may lead to faster position reductions when liquidity deteriorates. Therefore, long-term yields in 2026 will reflect not only macroeconomic expectations but also the market's own balance sheet capacity. The yield on French 10-year government bonds remained around 4.7% on October 6, while the yield on British 30-year government bonds had previously broken through 6%, both indicating that fiscal credibility, debt supply, and term premiums are being repriced more frequently.

Frequently Asked Questions

Question 1: Does the rise in US long-term Treasury yields indicate that inflation expectations are out of control? Answer: Not necessarily. A rise in nominal yields can simultaneously stem from real interest rates, policy rate expectations, and term premiums. The difference between the nominal and real yields of the US 10-year Treasury bond is approximately 2.36 percentage points, indicating that inflation compensation is still a component, but not sufficient to prove that long-term inflation expectations have decoupled. Question 2: Why hasn't the weakening US employment data led to a significant drop in long-term yields? Answer: US employment data primarily affects short-term policy expectations, while long-term yields also need to consider fiscal supply, energy shocks, and term premiums. As long as these risk compensations remain high, the yield curve may exhibit a temporary divergence from monthly US employment data.