U.S. Treasury yields jump across the curve on Middle East inflation fears; odds of a Fed hike this month at 68%
In the bond market on Tuesday, local time, the yield on the 10-year U.S. Treasury note, the global benchmark, rose as high as 4.7980% intraday, the highest level since Jan. 14 last year, just before President Donald Trump returned to office. The two-year yield, sensitive to monetary policy, jumped to 4.3890%, while the 30-year yield, the reference for U.S. mortgage rates, rose to 5.286%, approaching its highest level since 2007, just before the global financial crisis. Both have moved well past the psychological resistance levels Wall Street watches: 4.5% for the 10-year and 5.0% for the 30-year. Higher yields mean lower bond prices. The 30-year Treasury yield has now closed above 5.0% on 56 days so far this year, the longest such stretch since 2006. The surge in yields pushed major New York stock indexes lower, with the Dow Jones Industrial Average down 0.79%, the S&P 500 down 0.71% and the Nasdaq Composite down 1.03%. The Philadelphia Semiconductor Index, which can influence the Korean market, fell 2.14%.
The renewed jump in yields is attributed to higher oil prices as the United States and Iran continue trading military blows over the Strait of Hormuz. Oil prices have stoked investor worries that inflation will worsen for some time. On the ICE Futures exchange in London, Brent crude for November delivery settled 4.60% higher at $94.65 a barrel, while U.S. West Texas Intermediate for October delivery on the New York Mercantile Exchange closed 5.20% higher at $90.22 a barrel. Brent was at its highest since July 24 and WTI since July 23.
U.S. Central Command said it had resumed airstrikes on targets of Iran's Revolutionary Guard Corps (IRGC) after a two-day pause. IRGC spokesman Hossein Mohebbi warned on X, formerly Twitter, the same day that "harsh punishment awaits the aggressors" and that "the United States will regret its new attacks." Iran's Khatam al-Anbiya Central Headquarters, which coordinates the country's armed forces, said in a statement that it would "impose a heavy price on the enemy" and would "deliver destructive and lethal blows to the cowardly and evil American enemy that struck Sistan and Baluchestan and Hormozgan provinces."
Also weighing on the bond market were remarks by Fed Chair Kevin Warsh, who signaled in a speech at the central bank's economic policy symposium in Jackson Hole, Wyoming, on Aug. 28 that a rate increase could be considered. Market participants increasingly believe inflation is too high for the Fed to stand pat. "We must be confident that underlying inflation is moving toward our goal at a clear and sufficient pace," Warsh said at the time. "Otherwise, we will do what we have to do." According to CME Group's FedWatch, the federal funds futures market on Tuesday put the probability that the Fed holds rates steady at its Federal Open Market Committee meeting on Sept. 15-16 at 31.8%, down from 64.6% on Aug. 27, just before Jackson Hole. The odds of a hike rose to 68.2% from 35.4%. The probability that the Fed keeps rates unchanged for the rest of the year fell to 8.9% from 25.9%, while the chance of a hike rose to 91.1% from 74.1%.
The Labor Department's Job Openings and Labor Turnover Survey (JOLTS), released Tuesday, showed 7.27 million job openings in July, up 89,000 from June and in line with the consensus forecast compiled by Dow Jones. The figure was read as a sign that the labor market remains relatively stable even as prices climb.
Another factor behind weak bond prices is the flood of corporate debt issued amid the race to invest in AI. The five largest hyperscalers — Amazon, Microsoft, Google parent Alphabet, Facebook parent Meta and Oracle — issued $159 billion of corporate bonds in the first half of this year alone. Morgan Stanley forecast on June 10 that global Big Tech companies would issue a combined $570 billion of corporate debt this year.
Bond prices tumble across Japan and Europe on fiscal worries; Bessent says there is "no turmoil"
The bigger problem is that the selloff is not confined to the U.S. market. Government bonds of other major economies — not just those of a U.S. federal government whose debt topped $40 trillion for the first time last month — are trading at ever lower prices amid fiscal strains. In Japan, the 10-year yield rose to 3% intraday on Tuesday, the highest in nearly 30 years, since October 1996. The move reflected concerns about Prime Minister Sanae Takaichi's large-scale spending plans combined with expectations of further BOJ rate increases. Japanese government ministries' budget requests for the fiscal year running from April 2027 to March 2028 totaled 143 trillion yen, a record high for the fourth straight year.
The same day in Britain, the 30-year gilt yield rose as high as 5.919%, the highest since 1998, while the 10-year yield reached 5.224%, the highest since 2008. Germany's 10-year Bund yield rose to 3.339% intraday, the highest since 2011.
The across-the-board rise in sovereign yields has set off alarms for corporate investment, household borrowing and government finances. With long-dated yields climbing, mortgage rates could rise further ahead of the U.S. midterm elections on Nov. 3 — a potentially devastating development for the Trump administration. If real rates spike while corporate bond supply floods the market, the AI investment bubble could deflate. Heavier borrowing costs for households would reduce spending power. And higher interest costs for governments risk a vicious cycle in which deteriorating finances erode sovereign credit ratings.
Even so, Treasury Secretary Scott Bessent has turned attention outward, pressing Japan to take steps to strengthen the yen. In a CNBC interview on Aug. 31 during a Group of 20 meeting in Asheville, North Carolina, Bessent said he believes "the Japanese government and the Bank of Japan will do something that leads to a stronger yen," signaling that Japan could raise rates again at its monetary policy meeting on Sept. 17-18. According to the Treasury Department, Bessent also met BOJ Governor Kazuo Ueda on Aug. 30 at the G20 finance ministers' meeting and said he "strongly supports Japan's resolute monetary policy actions to address the substantial undervaluation of the yen." He added that "yen weakness is contributing to domestic inflationary pressure in Japan" and stressed the importance of "sound monetary policy to anchor inflation expectations and avoid excessive exchange-rate volatility." The push for further action came after the yen hovered around 160 per dollar despite joint yen-buying by Washington and Tokyo on July 31.
In a letter last month to Democratic Sen. Elizabeth Warren, who had asked for the legal basis for the Treasury's use of the Exchange Stabilization Fund (ESF) in its Aug. 27 yen purchases, Bessent openly acknowledged that the intervention was aimed at containing U.S. Treasury yields, writing that "disorderly conditions in the yen market could ultimately raise borrowing costs for American households and businesses." In a Reuters interview on Aug. 30, however, Bessent distanced himself from the idea of a crisis, saying, "I'm not sure where the bond market turmoil is," and that "the U.S. bond market is performing best among the world's major markets." Speaking to Fox Business on Tuesday, he again insisted that on Treasuries, "I don't think we're in any kind of serious situation."
How long the broad weakness in global bond prices lasts appears to hinge on whether inflation persists. Above all, unless the Middle East war ends, whatever new market-stabilization measures the Trump administration unveils are unlikely to have much effect. Even expectations of another Japanese rate increase this month appear largely priced in, thanks to Bessent's early comments. That leaves the administration with dwindling options for artificially lowering market rates before the midterms. And if the Fed delivers a surprise rate increase at this month's FOMC meeting, yields could rise beyond control.
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