U.S. long-term Treasury bonds came under pressure again this week, with the yield on 10-year Treasuries rising to 4.92% on Thursday, hitting a new high since 2023 and just a step away from the 5% threshold that Wall Street is closely watching. As the war in Iran drives up oil prices, markets have begun to take into account the risk of more stubborn inflation, which also increases the likelihood of the Federal Reserve raising interest rates next week.
Oil prices and supply shocks intensify
Fortune Quoting the judgments of several economists, supply shocks such as wars, tariffs, poor harvests, and disrupted shipping have occurred repeatedly in the past few years, and businesses and households have gradually developed expectations for price fluctuations. Now, these expectations are beginning to be more clearly reflected in the bond market.
The efforts of the U.S. Treasury Secretary to stabilize the bond market have not been able to curb the upward trend in long-term interest rates. Meanwhile, international oil prices have once again surpassed $100 per barrel, exacerbating market concerns about the transmission of energy costs to broader prices.
Interest rate hike expectations are heating up rapidly
Interest rate futures indicate that the market currently expects a 75% probability of the Federal Reserve raising interest rates next week. Reports suggest that investors are no longer waiting for clearer signals from the Fed; instead, they are directly reflecting higher inflation and interest rate paths by selling long-term government bonds in advance.
Some economists believe that this tightening driven by the bond market itself could also exacerbate the problem. If investors begin to doubt the Federal Reserve's willingness to curb inflation, long-term bonds may demand a higher risk premium, driving yields even further upward.
- 10-year U.S. Treasury yield rises to 4.92%
- The market expects a probability of interest rate hike next week to be around 75%.
- International oil prices return above $100 per barrel
In August, the PPI sub-item remains strong.
The market is currently focused on the upcoming release of the U.S. Consumer Price Index. However, the Producer Price Index for August, which was released on Thursday, has already alleviated some of the pressure. The data shows that in August, PPI rose 0.4% month-on-month and 5.4% year-on-year, in line with market expectations, although some sub-items still showed relatively high increases.
Among them, diesel prices rose by 24.1% year-on-year, heating oil and distillate oil prices rose by 22.8%, and egg prices rose by 32.2%. Some economists believe that such cost increases are difficult for companies to fully absorb, and they may still be transmitted to the CPI and the PCE indicators that the Federal Reserve is more concerned about.
There are also views that the details of PPI are not sufficient to support an immediate interest rate hike. Economists at the Oxford Institute for Economics estimate that the corresponding core PCE monthly growth rate may only be 0.15%, which is not strong enough to trigger a policy shift.
The market turns to test the Fed's credibility
The report suggests that the current issue is no longer merely about the strength of monthly inflation data, but rather a re-evaluation by the market of the credibility of the Federal Reserve's policies. If the Fed attempts to allow the bond market to tighten further on its own, investors may continue to test just how high long-term interest rates Washington is willing to tolerate.
In this context, the volatility in the bond market is no longer limited to interest rate trading alone; it is also being transmitted to a broader range of asset pricing. Next, U.S. inflation data and the results of the Federal Reserve meetings will become key indicators to determine whether long-term yields will continue to approach 5%.
