The yield on the US 10-year Treasury note surpassed the 5 percent threshold on September 14 for the first time since 2023, reflecting rising concerns over inflation amid increased government and corporate borrowing. The yield, which serves as a key benchmark for US mortgage rates and global bond markets, briefly climbed to 5.01 percent before retreating slightly as buyers stepped in.

Rising crude oil prices, which approached US$110 per barrel, have intensified fears of growing inflationary pressures ahead of the US Federal Reserve's scheduled policy announcement on September 16. The jump in energy costs has compounded worries about inflation, contributing to sustained upward pressure on long-term borrowing costs.

The 5 percent level is a significant psychological barrier for investors, with market participants viewing it as a potential entry point to buy Treasuries. Molly Brooks, US rates strategist at TD Securities, noted that this milestone often prompts some investors to consider purchasing on a dip. Nonetheless, despite a partial pullback to around 4.99 percent in early New York trading on September 15, market sentiment remains fragile.

The rise in yields has weighed on government bond prices worldwide, with British and German debt also declining. At one point, BlackRock’s iShares 20+ Year Treasury Bond ETF, the largest fund specializing in long-term US Treasuries, hit its lowest intraday level since its inception in 2002. The increase in yields poses risks to economic growth and equity markets, especially as stock valuations remain elevated.

US Treasury Secretary Jetot Bessent has taken various measures aimed at curbing long-term borrowing costs, including expanding bond buyback programs, urging Japan to limit its Treasury sales, and signaling the possibility of reducing the issuance of long-term debt. However, these efforts have yet to make a significant impact. The 10-year yield has been rising for seven consecutive months, matching the longest stretch of increases since 2011.

The surge in yields is driven by multiple factors, including escalating global government borrowing, large fiscal deficits, corporate bond issuance to finance artificial intelligence infrastructure, and inflation concerns intensified by the recent conflict in Iran, which has contributed to higher oil prices. Zach Griffiths, head of investment-grade and macro strategy at CreditSights, suggested that 10-year yields could continue to climb toward 5.5 percent amid these structural pressures.

The US Treasury market has expanded substantially in recent years, now standing at approximately US$32 trillion compared with about US$4.5 trillion in 2007. This growth has pushed federal debt beyond 100 percent of GDP, leading Fitch Ratings to caution in August that the country remains vulnerable to future economic shocks.

In contrast to October 2023, when the 10-year yield briefly rose above 5 percent before retreating as inflation eased and the labor market weakened, this year’s resilient employment figures have maintained investor focus on inflation risks and the likelihood that borrowing costs will stay elevated. Treasury securities are poised for their first annual loss since 2022.

Market observers note that while the 5 percent yield mark often attracts buyers, the trajectory of rates remains highly sensitive to developments in the Middle East and energy markets. Izaac Brook, rates strategist at RBC Capital Markets, acknowledged the tentative bounce near 5 percent but emphasized that the market continues to grapple with persistent inflationary pressures.

So far, the bond market has experienced orderly conditions with limited volatility. However, a notable position has emerged in the Secured Overnight Financing Rate options market, where traders have invested over US$100 million in premiums betting on reduced interest rate fluctuations.

The Federal Reserve’s upcoming policy decision carries significant weight for the trajectory of yields. Interest rate swaps imply more than a 90 percent chance that the Fed will raise borrowing costs for the first time since 2023 during its September 16 meeting. Treasury Secretary Bessent’s attempts to stem the rise in yields reflect broader concerns over the economic impact of sustained higher borrowing expenses amid ongoing inflationary challenges.