US 10-year yield flirts with 5% as higher oil, rate hike worries swirl

U.S. Treasuries fell on Friday, taking the yield on the benchmark 10-year note near ​the closely watched 5% level as surging oil prices fanned inflation angst while traders ramped up wagers on a rate hike from the Federal Reserve next week.

Yields on 10-year Treasury notes rose to 4.97% in early Asian hours, trading at their highest levels since late 2023 and keeping investors nervous ‌about the possibility ⁠of a jump ⁠beyond 5%, a level briefly breached three years ago.

The yields on 30-year Treasury notes also hit their highest levels since 2007 at 5.38%, with the ​selloff in bonds spreading across the globe. Japanese government bond (JGB) yields rose across the curve on Friday.


"These are worrying times for bond markets, and ​by extension also for the wider risk asset space," said Padhraic Garvey, head of global rates and debt strategy at ING.

Some analysts view 5% on the 10-year note as a critical line that could make bonds more competitive with stocks, potentially pulling dollars out of equities. Higher Treasury yields also flow through to the broader economy ⁠through costlier ‌mortgages, auto and consumer loans, and more expensive corporate and municipal borrowing.

"Could things get even more sinister? ​Yes, where a break above ​5% on the 10-year yield does nothing more than bring 6% into focus," ING's Garvey ⁠said.

"Such a journey (from 5% to 6%) would be a far tougher one for the ​wider market to stomach. We're not calling for it. But we're also not not ​calling for it."

The 10-year yields broke above 5% in October 2023 for the first time since 2007, reaching 5.021%. But the yields held above that threshold for only one day, before dipping as the level drew in buyers.

Brent crude futures rose 1% to $108.68 a barrel, set for about a 13% weekly jump, as increasing attacks along key shipping routes in the Middle East fuel fears of a prolonged disruption to supplies, stoking inflation worries.

The ructions in bond and oil markets this week set the ‌stage for the August consumer price index report, due later on Friday after data on Thursday showed U.S. producer prices increased in August amid higher costs of goods, airline fares and hospital services.

The CPI data will be parsed by investors to gauge what the Fed ⁠may do next week. Traders are pricing in a 72% chance of a hike, up from 49% a week earlier, the CME FedWatch tool showed.

"The Fed will scrutinise the CPI data for signs of underlying inflationary pressure and that's probably the ​bigger factor that could influence its decision on rates next week," said Vasu Menon, managing director of investment strategy at OCBC.

"Benign inflation data could make it harder for the Fed to hike rates and our base case scenario is for the Fed to leave rates unchanged," Menon said.

The bond selloff also deepened after the U.S. government said it bought back $5.2 billion worth of bonds in its latest buyback operation meant to support market liquidity, less than the $6 billion cap and only half of the $10.5 billion in bonds offered in the operation.