The US bond market issued another alert on Monday (Sep 14). The benchmark 10-year US Treasury yield briefly climbed above 5% intraday, hitting its highest intraday level since 2007. Meanwhile, Middle East tensions pushed oil prices back toward $109 per barrel. With the Fed’s rate-setting meeting due this week, the combination of high inflation, elevated oil prices and high-rate risks has deepened market concerns over rising financing costs and tighter financial conditions.
Dow Jones Market Data showed the 10-year US Treasury yield rose as high as 5.011% on Monday, marking the highest intraday reading since July 19, 2007, when it reached 5.069%. It later pulled back to 4.96% on dip-buying, before returning near the 5% level during afternoon New York trading.
The 10-year Treasury yield is widely viewed as a key “affordability rate” in the US economy. Its movements directly affect mortgage rates, corporate financing, capital spending by tech firms and the US government’s own borrowing costs.
5% emerges as a key psychological threshold
Will Compernolle, macro strategist at FHN Financial, said the yield peak seen in 2023 serves as an important technical reference for the current cycle. He noted that as the 10-year yield neared this level again, dip-buyers stepped in quickly, lifting bond prices and temporarily pushing yields lower.
According to Dow Jones Market Data, the last time the 10-year Treasury yield broke above 5% was in October 2023, though it did not hold that level for long.
Brij Khurana, fixed income portfolio manager at Wellington, described 5% as a “psychologically significant level”, and policymakers have begun to express concern over the sustained rise in yields.
He warned that if the Fed chooses not to raise rates at Wednesday’s meeting, it risks losing control over 10-year and 30-year Treasury yields, a scenario similar to the UK bond market turmoil in 2022.
Khurana therefore supports a “preemptive rate hike” by the Fed, arguing that bond market conditions are clearly strained at present.
The $31.5 trillion US Treasury market under pressure
Since this summer, the roughly $31.5 trillion US Treasury market has suffered heavy selling, further raising financing costs for households, businesses, AI hyperscale computing firms and the US government itself.
At the same time, the US federal fiscal deficit has recently approached $2 trillion. Massive funding needs mean the Treasury must keep issuing large volumes of bonds to the market, adding extra upward pressure on long-term yields.
Macquarie strategists Thierry Wizman and Gareth Berry said rising oil prices are amplifying existing stress in global bond markets. Beyond inflation risks stemming from Middle East conflicts, the market must absorb a growing supply of bonds, including financing needs from huge capital expenditures by AI companies and large budget deficits across governments.
Bond prices move inversely to yields, so sustained yield increases show investors are demanding higher risk compensation.
Oil prices edge closer to $109
Another major source of pressure on the bond market comes from the energy sector.
As Iran-related conflicts escalated further, global oil prices rose sharply again on Monday. Crude briefly neared $109 per barrel before pulling back slightly, yet remained near highs seen since May.
In June this year, the US and Iran reached a fragile ceasefire, and oil prices briefly fell close to $70 per barrel. At that time, markets expected inflation pressure from energy costs might fade rapidly.
But conditions have deteriorated recently. Iran-backed Houthi militants in Yemen have expanded their control in the Middle East and attacked Saudi Arabia’s key east-west oil pipeline, putting alternative crude shipping routes that bypass the Strait of Hormuz under greater strain.
Kieran Osborne, Chief Investment Officer at Mission Wealth, stated: “The impact of the Middle East conflict is ongoing, and it does not look like the situation will resolve itself anytime soon.”
Pressure mounts for another Fed rate hike
US inflation remains above 3%, well above the Fed’s long-run 2% target. The renewed rally in energy prices has further raised the risk of inflation reaccelerating, drawing greater market attention to Wednesday’s Fed policy meeting.
The 2-year US Treasury yield, highly sensitive to monetary policy, recently stood at around 4.66%, markedly above the upper bound of the Fed’s current policy rate range of 3.50%-3.75%. This shows markets are pricing in at least one more rate hike before the end of the year.
Khurana believes that if the Fed takes no action under current conditions, long-term yields could spiral further out of control. The reason is that markets may perceive the central bank as underreacting to rising energy prices and peRSIstent inflation, and therefore demand a higher risk premium on long-dated bonds.
Osborne, however, remains relatively optimistic about US economic resilience. He thinks the US labor market stays solid, and the economy retains some ability to withstand Iran-related conflicts, trade frictions and cost-of-living pressures.
“I think the US economy is more resilient than many people expect,” he said. Against this backdrop, he expects the Fed may deliver only one rate hike this year, and the US economy can absorb the recent higher bond yields.
Higher yields start to test the stock market
The high-rate environment has re-emerged as a major headwind for US equities.
US stocks closed lower on Monday. According to Dow Jones Market Data, after the 10-year Treasury yield briefly hit 5% in 2023, the S&P 500 fell 1.2% in the following week; yet it rose 8.1% over the next month and 20.2% in the subsequent six months, indicating that 5% alone does not necessarily trigger a sustained stock market decline.
Still, short-term volatility risks are rising. Wall Street’s fear gauge, the VIX, climbed 8.2% on Monday to 17.14, signaling markets expect larger swings in the S&P 500 over the next 30 days.
Meanwhile, discussions within the AI industry about slowing some technology development over safety concerns have further stoked worries over AI capital expenditure and tech stock valuations.
Capital flowed noticeably into the cybersecurity sector on the day. FactSet data shows the iShares Expanded Tech-Software Sector ETF rose more than 5% on Monday.
The US dollar draws fresh safe-haven bids
The US dollar also gained some safe-haven support amid bond market turbulence. The ICE US Dollar Index rose 0.4% on Monday, strengthening against a basket of major currencies. Earlier this summer during the US Treasury sell-off, the dollar struggled to derive clear support from rising yields.
The core contradiction in the market is becoming clearer at present: rising oil prices lift inflation risks, which may push the Fed to maintain or even toughen its hawkish stance; higher interest rates in turn keep driving US Treasury yields and overall financing costs upward.
Now that the 10-year US Treasury yield has reclaimed the key psychological level of 5%, whether the Fed elects to raise rates or attempt to stabilize markets via policy guidance at this week’s meeting will become a critical variable for global asset pricing.