10-year U.S. Treasury yield breaks above 5%, hitting a near 20-year high; Fed's anti-inflation credibility faces a major test.

U.S. 10-year Treasury yields rose to their highest level in nearly 20 years, becoming the most prominent marker of a global bond selloff. The selloff has been driven by surging energy prices, rising debt levels and inflationary pressures. The "anchor of global asset pricing" breaks above 5%, and the Fed's anti-inflation credibility faces a major test. On Tuesday, the 10-year U.S. Treasury yield, known as the "anchor of global asset pricing," rose as much as 4 basis points to 5.02%, surpassing its 2023 peak and reaching its highest level since 2007. The latest leg higher in yields followed a rise in global oil prices, with risks to Middle Eastern oil supply mounting. Pressure in the bond market has intensified tensions ahead of the Fed's rate decision on Wednesday. Investors expect Fed officials to raise short-term borrowing costs for the first time since July 2023. If the Fed does not hike, or if Fed Chair Kevin Warsh signals that monetary tightening in the coming months will be less aggressive than what the money market is currently pricing, bond investors may demand higher yields to protect against inflation risk. BMO Capital Markets strategist Will Hartman said: "If the Fed holds rates steady this week, it will very likely damage its anti-inflation credibility. The market is not only vulnerable to the shock of an unexpected hold, but also to a 'dovish hike'that is, a dot plot or press conference that conveys a more patient signal." PGIM Credit chief global economist Dalip Singh said: "The more the Fed can demonstrate its anti-inflation credibility, the more likely it is to compress the risk premium at the long end of the Treasury curve over the medium term." U.S. Treasury yields matter so much because they are the pricing benchmark for all other types of loans. In the stock market, they are also used as a discount rate to measure the present value of expected profits in future years. The higher the yield, the smaller the present value of discounted forward earnings. In addition, elevated bond yields can trigger an outflow of funds from stocks, because higher returns attract investors toward bonds. Middle East conflict, AI debt issuance and deficits intertwine, making bond market selling pressure hard to dissipate. Since the United States launched military action against Iran at the end of February, disrupting oil and gas supply in the Middle East, global bond yields have continued to climb. In addition, heavy corporate borrowing for artificial intelligence spending has also been a driver, both causing a surge in market debt and stimulating an already resilient U.S. economy. The rise in yields has made things difficult for the Trump administration, because it creates ripple effects in the market, pushing up mortgage and other borrowing costs ahead of the November midterm elections. Earlier this month, U.S. President Trump threatened to cut off all U.S. trade with some countries if the Fed did not cut rates, a move that would almost certainly worsen the bond selloff by stoking inflation concerns. U.S. Treasury Secretary Scott Bessent tried to curb the rise in bond yields by increasing Treasury debt buybacks, but such operations failed to work. At the same time, the amount of debt issued by governments has continued to rise, both to refinance maturing bonds and to cover fiscal deficits. Yet at this point, major central banks are no longer buying large amounts of government bonds through quantitative easing, and demand from other traditional buyers has also cooled, leaving the market more reliant on price-sensitive investors. Phoebe White, head of U.S. rates strategy at UBS Group, said: "Given that we are not seeing signs of weakness in the real economy, and that the supply-demand dynamics of the U.S. Treasury market are very different from 2007, there is limited room for long-term yields to fall. Structural demand for U.S. Treasuries, especially from foreign official investors, has weakened significantly." A JPMorgan strategist team led by Jay Barry said they expect a possible rate hike this week, but they are "bearish" on long-end Treasuries because traders may react to the Fed statement and Warsh's press conference. Others are also cautious, believing the selloff could restart if the Fed surprises investors. Ed Al-Hussainy, a portfolio manager at Columbia Threadneedle, said: "If the Fed does not hike, the long-bond selloff could become even more disorderly."