The bond market has experienced a significant selloff, pushing the benchmark 10-year Treasury yield to 4.97% by the end of last week. This level is just shy of the peak reached in October 2023, when it briefly climbed over 5% in a single trading session before buyers intervened. This rise in borrowing costs is causing anxiety from Wall Street to Washington about its potential impact on the US economy.
Several factors are contributing to this surge in yields. Rising oil prices are threatening a new inflation shock. The Trump administration's attempts to ease pressure on the government debt market have been unsuccessful. Additionally, the federal deficit has hit $2 trillion in the first 11 months of the fiscal year, and the artificial intelligence boom is simultaneously flooding markets with debt and stimulating the economy, further playing a role in the upward movement of yields. Geopolitical tensions, such as the Iran war, are also cited as factors pushing longer-term yields higher.
The recent rout has increased pressure on the Federal Reserve, particularly Chairman Kevin Warsh, ahead of the central bank's meeting on Wednesday. Following data showing a stronger-than-expected rise in consumer prices last month, futures markets are pricing in approximately a 90% chance that the Fed will raise its overnight benchmark rate by a quarter percentage point. This potential rate hike is seen as necessary to combat inflation that has exceeded the central bank's 2% target for half a decade. However, some investors warn that if the Fed does not hike rates, it could lead to a more disorderly selloff in bonds, as it might raise doubts about the Fed's commitment to controlling inflation, leading investors to demand a larger term premium for holding longer-dated US debt.
