Second time since 2007 financial crisis

High oil prices, fiscal deficit, AI investment weigh

Stock markets flash red as Fed rate hike odds climb to 90%

The Federal Reserve building in Washington against a blue sky in May 2020. [Reuters]
The Federal Reserve building in Washington against a blue sky in May 2020. [Reuters]

A sustained selloff in US Treasuries pushed the 10-year yield past the psychologically significant 5% threshold Monday (local time), raising concerns that borrowing costs for businesses and households will climb further.

According to electronic trading platform Tradeweb, the 10-year Treasury yield hit 5.00% at 10:19 a.m. Eastern time before rising to 5.012%, up 2.9 basis points from the previous session. The yield has since hovered around the 5% level. Bond yields move inversely to prices, so the rise in yields reflects a decline in bond prices.

The 10-year yield crossing 5% marks only the second time it has done so since 2007, just before the global financial crisis, and the first time since October 2023. Even in 2023, the yield held above 5% for just a single day, Bloomberg reported.

The 10-year yield has risen 80 basis points this year. The rate serves as a key benchmark for corporate bond issuance costs and also heavily influences US mortgage and student loan rates. The 5% level is widely regarded in financial markets as a critical psychological threshold.

Broader upward pressure is evident across the Treasury curve. The 2-year yield, more sensitive to monetary policy, was trading around 4.66%, while the 30-year yield hovered near 5.37%.

The surge in yields reflects a confluence of domestic and external factors. A prolonged US-Iran war has sent oil prices sharply higher, reigniting inflation fears.

Saudi Arabia's closure of its East-West Pipeline — a key crude oil transit route that had bypassed the Strait of Hormuz — pushed the global benchmark November Brent crude futures above $108 a barrel that day.

Adding to the pressure, the US August consumer price index released Friday showed inflation still running well above the Federal Reserve's 2% target, deepening concerns that price pressures are becoming entrenched.

August CPI rose 3.4% year-on-year, while core CPI — which strips out energy and food — climbed 2.4%. Analysts said the massive US fiscal deficit and a wave of bond issuance tied to the AI infrastructure investment boom have compounded the problem, fueling supply-demand imbalances and pushing up the term premium — the extra yield investors demand on long-term bonds to compensate for future uncertainty.

Treasury Secretary Scott Bessent has sought to cap yields through measures including purchases of long-term bonds, but observers say his efforts have been insufficient to stem the market's selling pressure.

The New York Times noted that both 2007, when the 10-year yield climbed to around 5.3%, and the present share a common feature: strong growth concentrated in specific sectors such as real estate and AI. It added that if AI's promised innovations fall short of expectations, the risks to the broader economy could intensify.

Markets are increasingly pricing in Federal Reserve tightening to rein in inflation. Rate futures traders are treating a rate hike at this week's Federal Open Market Committee meeting as a near-certainty.

According to the CME FedWatch tool, the probability of the Fed raising rates by 25 basis points at the FOMC meeting climbed from 87.3% Monday to 90.1% Tuesday.

Experts warn that persistently rising borrowing costs could erode the relative appeal of risk assets such as equities while increasing the financial burden on businesses and households. Anthony Ji, head of equity strategy at Bank of America Private Bank, said the biggest near-term concern for stocks is "the 10-year Treasury yield staying above 5%."


yckim6452@heraldcorp.com