A double squeeze from the Federal Reserve and the Treasury has pushed the 30-year yield to its highest level since 2006.

U.S. long-term Treasury bonds are under the most sustained pressure in nearly two decades. Caught between persistently high fiscal deficits, a surge in corporate bond issuance, and rising expectations of a Federal Reserve interest rate hike, the 30-year Treasury yield has remained above 5% for the longest period since 2006, and market concerns about long-term interest rates are unlikely to dissipate in the short term.

According to Bloomberg data, as of Monday, the 30-year US Treasury yield has closed above 5% for 55 trading days this year, the most days it has broken through this level in any year since 2006. The yield touched 5.34% in mid-August, its highest level since 2007, just 10 basis points away from a 22-year high. It currently stands at 5.27%.

Treasury Secretary Bessant announced last month an expansion of the old debt repurchase program in an attempt to suppress long-term yields, a move that initially shook the market. However, most investors do not believe this is enough to reverse the trend—corporate bond issuance in September is expected to reach $215 billion, following closely on top of August's record; meanwhile, the US fiscal deficit shows no signs of improvement in the short term, and its downward pressure on the Treasury market will continue.

Following Federal Reserve Chairman Warsh's hawkish speech in Jackson Hole last week, traders on Monday priced in a probability of a roughly 17-basis-point rate hike at the September 15-16 meeting to nearly 70%. If the Fed remains on hold amid stubborn inflation, selling pressure on long-term bonds is expected to intensify further.

Yields remain high, historical records have been broken.

Bloomberg data shows that the 30-year US Treasury yield has closed above 5% for 55 days this year, surpassing all previous years and bringing the market back to the interest rate environment of 2006. The high of 5.34% reached in mid-August was just a step away from its highest level in 22 years.

This trend reflects deep market concerns about the long-term fiscal sustainability of the United States. John Briggs, head of North American interest rate strategy at Natixis, said that long-term yields will remain high "until welfare spending reforms change the deficit pattern," and bluntly stated that the Treasury's repurchase measures are "just a drop in the ocean."

The Ministry of Finance's buyback program could not withstand the surge in supply.

To curb rising long-term yields, Finance Minister Bessant announced last month an expansion of the old debt buyback program, a move that briefly shook the market. However, analysts generally believe its effect will be limited.

Corporate bond issuance is expected to reach $215 billion in September, following the record high in August, which will directly offset the Treasury's repurchase operations. Priya Misra, a portfolio manager at JPMorgan Asset Management, said that the Treasury's repurchases may help boost demand for long-term bonds, but "it is likely to be overwhelmed by the supply surge brought about by AI infrastructure construction."

"Despite Treasury buybacks and other recent policy moves, investors remain reluctant to increase their duration exposure," Bank of America rate strategists Meghan Swiber and Eleanor Xiao wrote in a report released Monday. "The shrinking official sector buying is making the market increasingly reliant on price-sensitive private demand to absorb the continued supply of Treasury bonds."

Federal Reserve interest rate hike expectations constitute a key variable

The September Federal Reserve meeting will be a crucial test of Chairman Warsh's hawkish stance. Following his hawkish remarks in Jackson Hole, the market has priced in a probability of a 17 basis point rate hike at this meeting to nearly 70%.

Because long-term bonds are more sensitive to inflation expectations, if the Federal Reserve chooses to hold rates steady amid persistently stubborn inflation, it will give investors more reasons to avoid 30-year Treasury bonds. Gregory Faranello, head of U.S. interest rate trading and strategy at AmeriVet Securities, said, "To push down long-term yields, interest rates need to be tightened." He expects the Fed to raise rates and is bullish on 10-year and shorter-term Treasury bonds.

Friday's August jobs data and the key inflation data on September 11 will provide the market with further information to assess inflation trends. Meanwhile, the options market has seen more aggressive betting – on Monday, some traders used Treasury options to bet that the 30-year yield would jump to around 5.7% before the contract expires on November 20.

The demand structure is fragile, and market divergence is intensifying.

The 30-year Treasury bond occupies a special position in the $31 trillion U.S. Treasury market. Its main buyers are institutional investors such as insurance companies and pension funds that seek to match long-term liabilities. Meanwhile, bond fund managers who prefer to control interest rate sensitivity tend to limit their exposure to long-term bonds. The inherent vulnerability of this demand structure is becoming increasingly prominent in the current environment.

After yields have risen by about 65 basis points from their year-to-date lows, some investors are beginning to question whether long-term bonds have much more room to fall. John Briggs said that after being bearish on long-term bonds all year, he has now shifted to a "more neutral" stance at current levels, noting that "term premiums and real yields have come a long way and don't have to keep rising at a high speed forever."

Priya Misra stated, "We may be approaching the peak of long-term yields, but given the interplay of various forces, uncertainty remains."

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