(Sept 14): An intensifying selloff in Treasuries pushed the US 10-year yield above 5% for the first time since 2023, as mounting inflation concern collided with swelling government and corporate borrowing needs.

The yield rose as much as four basis points to 5.01% on Monday. It last breached the 5% level in October 2023, and only for one day. 

The rise in the 10-year yield, a benchmark borrowing cost for global government and corporate debt as well as US mortgages, threatens to slow economic growth and weigh on equities that are trading at lofty valuations. Yields have kept rising despite Treasury Secretary Scott Bessent taking the unusual step of boosting buybacks of longer-dated bonds as the Trump administration seeks to keep borrowing costs in check.

Less than two months before the US midterm elections, the 10-year yield is now more than a full percentage point above its level before the outbreak of the Iran war. The conflict has sparked a surge in oil prices, adding to inflation angst. Those concerns were reinforced by hotter-than-expected consumer-price data for August, prompting traders to boost bets on Federal Reserve rate hikes starting as soon as Sept 16.

But the selloff also reflects deeper structural forces that have pushed up long-dated yields across major developed markets, with a gauge of global government borrowing costs rising to levels last seen in 2007. Investors are demanding greater compensation to hold long-term debt as governments and companies compete for capital amid widening fiscal deficits and a flood of issuance to fund artificial-intelligence (AI) infrastructure.

“There are a lot of underlying factors that make for a sustained selloff in rates as the path of least resistance for now,” said Zach Griffiths, head of investment-grade and macro strategy at research firm CreditSights. Ten-year yields could rise toward 5.5%, he said. 

The Treasury market has ballooned to about US$32 trillion (RM130.15 trillion) from around US$4.5 trillion since 2007, pushing the federal debt to more than 100% of US gross domestic product. Fitch Ratings warned in August that the country is “vulnerable to future economic shocks” as debt levels grow.

The last time the 10-year yield topped 5%, in October 2023, it stayed there for only one day. Buyers quickly emerged as the US labour market cooled and inflation eased, allowing the Fed to end its most aggressive tightening campaign in decades. By September 2024, the Fed began to cut rates. 

This time, a resilient labour market has kept investors focused squarely on inflation and the prospect that borrowing costs will remain higher for longer. Treasuries are now on course for their first annual loss since 2022. 

So far, the bond selloff has remained largely orderly, with volatility well contained. But Bessent has made clear his unease with the relentless rise in long-term borrowing costs.

The former hedge fund manager has taken several unconventional and sometimes controversial steps aimed at bringing down yields, including opening the door, in traders’ minds, to reducing long-term debt issuance and taking measures seen as easing pressure on Japan to sell Treasuries.

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