(Sept 11): Bond bears are pushing benchmark Treasury yields toward the closely-watched 5% level ahead of US inflation data that stands to determine expectations for a Federal Reserve (Fed) interest-rate hike next week.

The yield on 10-year notes has climbed almost 20 basis points this week to trade just below the psychologically-important level, which may attract dip buyers but also risks triggering further selling that could spill over into global markets. Around 4.95% on Friday, the yield has reached its most elevated since 2023 — and is approaching its highest since 2007.

The surge in yields comes as traders wrestle with rising oil prices and inflation that’s run above the Fed’s target for half a decade. A reading of the US consumer price index (CPI) on Friday stands to be one of the most pivotal in years as traders price in a roughly 70% chance of a rate increase at the Sept 16 Fed meeting.

“Hitting 5% on the 10-year Treasury yield looks more like an inevitability here than a forecast,” said Padhraic Garvey, the head of research for the Americas at ING Groep NV. “These are worrying times for bond markets.”

Yields on the two-year, which are more sensitive to Fed rate moves, rose to as high as 4.59% this week. Thirty-year yields hit their highest since 2007, luring standout demand at an auction of the securities. 

The moves have spilled over into bond markets worldwide, with Germany’s 10-year yield touching the highest since 2009 on Thursday. Australian benchmark yields reached levels last seen in over a decade on on Friday while Japanese equivalents traded close to the key psychological level of 3%.

New Zealand bonds fared particularly badly with two-year yields climbing by 25 basis points. A gauge of global yields was at its highest since 2007.

“A lower US CPI and a Fed hike are really the only circuit breakers I see at this point, otherwise I don’t think anyone is comfortable being long rates,” said Michael Tang, a rates strategist at Commonwealth Bank of Australia in Sydney. “It’s just massive hawkish sentiment taking over.”

That leaves traders on edge going into Friday’s main economic event — especially as Fed officials have underscored their focus on inflation in recent weeks. To Molly Brooks, a US rates strategist at TD Securities, a hotter-than-expected print stands to boost market expectations for a hike in September and additional tightening. 

The core CPI, excluding food and energy, is expected to show a monthly increase of roughly 0.2% in August, according to a Bloomberg survey of economists. The report will come a day after a measure of producer price inflation showed renewed pressure from rising energy prices last month.

For the US$32 trillion (RM130.33 trillion) Treasuries market, a move through 5% in 10-year notes would represent a growing challenge for Treasury Secretary Scott Bessent, who has struggled to stymie a sell-off in bonds ahead of midterm elections. On Thursday, his Treasury Department bought fewer bonds than expected during its first expanded buy-back operation. 

Bessent sought to downplay concerns fuelled by the latest sell-off, saying the Treasury market is in “very good shape” while highlighting the strength of two auctions in recent days, and touting US outperformance versus its peers. A Bloomberg total return gauge of US Treasuries is down 1.4% this year versus a 1% decline in a broader global equivalent.

“Unconventional communication and actions from the US administration are rattling bond investors,” said Andrew Ticehurst, a senior rates strategist at Nomura in Sydney. “The underlying backdrop was already fragile, due to high government debt burdens and high funding tasks.”

Movements in yields impact the cost of capital for virtually everything and everyone. That includes US mortgage rates, a politically salient metric for US voters ahead of the midterm elections, which are already at their highest level in over a year. 

As the global bond benchmark, Treasury yields are the reference price for debt markets across the world, which are also under pressure. A breach of 5% may be enough to trouble equity markets too.

The 5% level is “seen by some as a threshold above which financial markets might go into meltdown”, said John Higgins, the chief economic adviser for financial markets at Capital Economics. “While we aren’t convinced that 5% is that ‘magic’ number, higher Treasury yields would certainly pose a risk to the sustainability of the US’ public finances as well as threaten equities.”

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