10-year US Treasury yield breaks 5%! "Prophet" warns: Sell-off not over yet.

U.S. Treasuries faced another round of sharp sell-offs, with the 10-year yield breaking through the 5% mark on Monday, reaching a new high since 2023. Inflation concerns and supply pressures combined to put pressure on global bond markets.

The 10-year yield hit a high of 5.01% on Monday, the last time it broke through 5% was in October 2023, and it only lasted for one day before falling back.

The simultaneous strengthening of the US dollar saw the Bloomberg Dollar Spot Index rise by as much as 0.6% in a single day, potentially marking its best single-day performance since June 17, while all G10 currencies fell.

The continued rise in yields is putting dual pressure on the stock market and the economy. As the benchmark interest rate for global government and corporate debt, the rising yield on 10-year US Treasury bonds will push up borrowing costs, suppress overvalued equity assets, and drag down economic growth.

The market has already priced in the Federal Reserve's expected rate hike as early as September 16, and US Treasuries may record their first annual loss since 2022 this year.

Strategists predicting 5% of the market will not be over yet.

Steven Barrow, head of G10 strategy at Standard Bank, who first made a 5% forecast in February, said the sell-off is far from over. He raised his year-end forecast for the 10-year yield to 5.2% and expects it to rise further to 5.3% in the first quarter of 2027.

When Barrow made his 5% forecast in February, the market widely expected the Federal Reserve to cut interest rates continuously, and the 10-year yield was below 4% at the time, making his judgment seem extremely contrarian. Now, the situation in Iran, the energy price shock, and inflation data have successively confirmed his judgment, further strengthening the persuasiveness of his bearish stance.

He emphasized that the long-term structural forces driving interest rates upward— including global supply chain pressures, the ongoing impact of climate change, and the constraints on labor supply imposed by tightening immigration policies—are becoming stronger than ever before. Barrow stated:

"My structural assessment is that we are in a system where 'high interest rates will be maintained for longer.'"

He expects the Federal Reserve to raise interest rates once each in September and December, and then keep short-term interest rates unchanged until the end of 2027.

Rising inflation expectations trigger a new round of sell-offs

The immediate trigger for this sell-off came from multiple directions. Since the US military action against Iran, Middle Eastern energy supplies have been disrupted, oil prices have risen sharply, with WTI crude oil remaining above $100 per barrel on Monday, and inflation expectations rising accordingly.

Meanwhile, August's consumer price index data came in higher than expected, further solidifying market bets on a Federal Reserve rate hike.

With less than two months until the US midterm elections, the 10-year yield has risen by more than one percentage point since before the outbreak of the Iran-Iraq war. Treasury Secretary Bessant had previously resorted to unconventional measures, such as increasing long-term Treasury bond repurchases, in an attempt to lower long-term interest rates, but with limited effect, and the selling pressure has not eased.

Structural forces are pushing up global long-term interest rates.

This round of US Treasury bond sell-offs is not an isolated phenomenon, but rather reflects deeper structural pressures. Metrics measuring global government borrowing costs have risen to their highest level since 2007, investors are demanding higher compensation to hold long-term debt, and the competition between governments and corporations for capital is intensifying.

The U.S. fiscal deficit continues to expand, and the size of the national debt market has swelled from about $4.5 trillion in 2007 to about $32 trillion today, with the federal debt-to-GDP ratio exceeding 100%.

Fitch Ratings warned that the US's resilience to future economic shocks is declining. The surge in AI infrastructure construction has not only brought a large influx of new supply to the bond market but also continued to stimulate the economy, further increasing pressure on the bond market.

Zach Griffiths, head of investment grade and macro strategy at CreditSights, said, "There are many underlying factors that make continued interest rate increases the path of least resistance at present." He believes the 10-year yield could rise further to 5.5%.

The dollar strengthened, but analysts were divided on the market outlook.

Rising US Treasury yields boosted the dollar, but some strategists remain cautious about the sustainability of the dollar's rally.

Meera Chandan, co-head of global FX strategy at JPMorgan Chase, pointed out that the dollar's performance has lagged behind fundamentals in recent weeks. "High energy prices, strong August inflation and employment data, coupled with Fed Chairman Warsh's hawkish remarks at Jackson Hole, should have driven the dollar higher, but its performance has failed to keep up."

She maintains a bullish stance on the US dollar, particularly on low-interest currencies such as the Swedish krona and the Canadian dollar.

Elias Haddad, global head of market strategy at Brown Brothers Harriman & Co., cautioned that the dollar faces asymmetric risks—upside potential is limited in a hawkish scenario, as the market has already priced in approximately 100 basis points of rate hikes over the next 12 months; however, downside risks will be more pronounced should a dovish surprise materialize.

In the options market, the one-month risk reversal indicator for the US dollar index returned to positive territory for the first time since September 2, indicating that traders are positioning themselves for further dollar strength.

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