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Government bond markets remain under pressure as rising energy prices revive inflation concerns and increase expectations that major central banks will keep interest rates higher for longer.
The benchmark 10-year US Treasury yield briefly touched 5.011% on Monday, according to Dow Jones Market Data, before falling back below 5%. The level was the highest since October 2023.
The yield crossed the psychologically important 5% threshold as higher government borrowing, resilient economic growth and heavy corporate debt issuance linked to artificial intelligence investment compounded pressure on US bonds. Yields move inversely to bond prices.
Rising Treasury yields can feed through to mortgages, corporate loans and other forms of credit, potentially slowing economic growth. They can also make bonds more attractive relative to highly valued equities.
The latest rise followed the US Treasury’s previously announced expansion of its bond-buyback programme. Last week, it offered to purchase up to $6 billion of debt maturing in 10 to 20 years – three times the previous operation’s size.
The yield on the 30-year US Treasury bond, meanwhile, remained close to its highest level since 2007.
The sell-off has also spread across Europe. France’s 10-year government bond yield rose to 4.50% on Monday, while the equivalent Italian yield reached around 4.40%.
Germany’s benchmark 10-year Bund yield climbed as high as 3.538%, according to Dow Jones Market Data, its highest level in 15 years.
Energy prices are a major source of pressure. Brent crude rose to around $107 a barrel on Tuesday morning, while US West Texas Intermediate traded close to $103, as attacks on Saudi energy infrastructure and shipping in the Gulf intensified concerns about supplies through the Strait of Hormuz.
The European Central Bank raised its deposit rate by 25 basis points to 2.5% last week and warned that inflation could remain above its target for an extended period. Markets are pricing in at least one further ECB increase this year.
Attention now turns to three major central-bank decisions. The US Federal Reserve announces its decision on Wednesday, followed by the Bank of England on Thursday and the Bank of Japan on Friday.
A Reuters poll found that 85% of economists expected the Fed to raise rates by 25 basis points, while money markets placed the probability of an increase at around 93%.
The BoE is widely expected to leave rates unchanged. Economists surveyed by Reuters unanimously forecast no change, although some analysts have warned that a surprise increase cannot be ruled out. The BoJ is widely expected to raise borrowing costs.