US Treasury yield highest since 2007 ahead of Fed’s interest-rate decision

The bond rout threatens higher borrowing costs worldwide and could pile further pressure on Washington’s $40 trillion debt

The 10-year US Treasury yield has surged above 5% to its highest level in nearly two decades, extending a global bond sell-off driven by soaring energy prices, mounting government debt, and inflation fears.

The latest jump followed a surge in oil prices above $100 per barrel as the US war on Iran continues to threaten global energy supplies.

The rise, which took the 10-year Treasury yield to 5.04% on Tuesday – the highest since 2007 – threatens to drive borrowing costs higher in the US and beyond. Treasury yields serve as a benchmark for mortgages, corporate debt, and lending across global markets.

The sell-off has put additional pressure on the US Federal Reserve ahead of its interest-rate decision on Wednesday, with investors expecting the first hike since July 2023. Keeping rates unchanged or signaling a slower pace of tightening could drive bond yields even higher as investors seek protection against inflation, according to Bloomberg.

“It would be very difficult for the Fed to leave rates unchanged this week without eroding its inflation-fighting credibility,” BMO Capital Markets strategist Vail Hartman told the outlet.

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Higher rates also make Washington’s roughly $40 trillion national debt increasingly expensive to finance.

The renewed bond rout has gathered pace as the Middle East conflict drives energy costs higher. Brent crude has broken above $100 per barrel for the first time in nearly two months, raising concerns that more expensive fuel and transport could feed through to consumer prices and keep inflation elevated.

Washington’s borrowing needs are adding to the pressure. Persistent budget deficits require the Treasury to sell large volumes of new debt, increasing the supply of bonds that investors must absorb. As bond prices fall, yields rise to attract buyers, making future government borrowing more expensive.

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World’s biggest wealth fund eyes ditching $80 bn in US Treasuries

The pressure has spread across major bond markets. Yields have also climbed in Europe and Japan as investors reassess the outlook for inflation and interest rates, raising concerns that a prolonged period of elevated borrowing costs could strain governments, businesses, and households already carrying heavy debt loads.

US Treasuries are widely treated as one of the world’s safest and most liquid assets and underpin borrowing costs throughout the global financial system. A sustained sell-off could therefore tighten financial conditions far beyond the US, putting pressure on other bond markets, currencies and heavily indebted economies.

Demand from some of the traditional buyers of US debt is also weakening. “Structural demand for US Treasuries, particularly among foreign official investors, is materially weaker,” Phoebe White, chief US rates strategist at UBS told Bloomberg, adding that the scope for long-term yields to fall remains limited.

Norway’s $2.3 trillion sovereign wealth fund, the world’s largest, recently proposed cutting its US Treasury holdings by almost $80 billion. While small relative to the overall Treasury market, the move signals a further shift at the margins away from US debt as rising deficits force Washington to borrow more and foreign buyers show less appetite for Treasuries.