Four factors driving the surge in US Treasury yields: war, deficits, the Federal Reserve, and the AI financing boom.

The recent surge in US Treasury yields to multi-year highs is not due to a single factor. According to a Wall Street Journal analysis on September 2nd, four forces are simultaneously pressuring the bond market: reignited inflation expectations triggered by war, runaway fiscal deficits, a shift in the policy style of the new Federal Reserve chairman, and a surge in bond supply driven by the AI construction boom.

The surge in energy prices triggered by the Iran-Iraq War is considered the primary driving factor . Mike Goosay, Chief Investment Officer and Global Head of Fixed Income at Principal Asset Management, stated, "The sharp rise in global bond yields reflects investors reassessing the inflation outlook."

War Ignites Inflation: Diesel Prices Become a Key Variable

Since the summer, the US-Iran ceasefire agreement has broken down, and Ukraine has simultaneously launched operations to strike Russian oil refining facilities. As a major global exporter of diesel, Russia is facing these two combined shocks, driving diesel prices sharply higher.

According to Dow Jones Energy data, as of Wednesday, the average retail price of diesel across the United States had exceeded $5.68 per gallon, about $2 higher than a year ago. This price is less than one cent away from the peak reached this spring when the Persian Gulf conflict broke out and passage through the Strait of Hormuz was blocked, and only 13 cents away from the historical record set after the outbreak of the Russia-Ukraine war in 2022.

The transmission effect of diesel prices is particularly noteworthy—diesel is the main fuel for trucks, trains, construction machinery, and agricultural equipment. Price increases directly push up the production and transportation costs of various commodities, and the inflationary pressure is far more widespread than that of rising gasoline prices.

The futures market is also sending warning signals: diesel futures for October delivery have risen by about 13% in the past week.

Debt surpasses 40 trillion yuan: Fiscal deficit pressure continues to mount.

Besides inflation, fiscal issues are also a source of concern for investors.

Last month, the total U.S. federal debt surpassed $40 trillion for the first time. Measured as a percentage of GDP, the amount of debt held by the U.S. public is rapidly approaching its highest level since World War II.

This pressure is not unique to the United States. Soaring UK government bond yields have forced the government to begin debt reduction efforts; Japan's 10-year government bond yield has just hit its highest level in about 30 years, amid escalating debate over tax cuts and market concerns about a further deterioration in Japan's fiscal situation.

A key indicator of fiscal concerns is the "term premium"—the portion of government bond yields that exceeds market expectations for short-term interest rates. This indicator has risen significantly recently, but it's worth noting that the term premium has increased more in Europe and Japan, leading some investors and economists to believe that overseas markets are actually more deeply concerned about fiscal conditions.

New Fed Chair: Uncertainty Becomes a New Variable

In late August of this year, Federal Reserve Chairman Warsh delivered a speech at the Jackson Hole conference, which to some extent alleviated market concerns about the Fed's lack of determination to combat inflation, but also triggered a new round of yield increases.

Unlike his predecessor, Warsh deliberately avoided forward guidance. This shift in policy style is being priced into long-term borrowing costs in the United States and globally.

David Kelly, chief global strategist at JPMorgan Asset Management, stated bluntly: "If there's one thing that's significantly different from a few months ago, I think it's the way the Fed has behaved since Warsh took over. I think the market has incorporated a Fed risk premium, even if that premium is still relatively small."

Meanwhile, Treasury Secretary Scott Bessent's plan to buy back more long-term Treasury bonds has proven unsustainable in boosting confidence. Kelly commented bluntly: "If the government says it will raise taxes and cut spending to reduce the deficit, that's one thing. But saying you've found another credit card out of a stack of 20 that isn't maxed out doesn't really boost confidence."

AI Financing Boom: New Pressure on Bond Supply

In addition to the three factors mentioned above, the boom in artificial intelligence infrastructure construction is driving large-scale corporate bond issuance, further exacerbating supply pressure in the bond market.

As tech companies continue to pour funds into the bond market to raise capital for their AI initiatives, the significant increase in bond supply, coupled with a failure of demand to keep pace, has put additional upward pressure on yields.

The interplay of four forces makes it difficult for the bond market to find a clear respite in the short term.

Risk warning and disclaimerInvesting involves risk; please exercise caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Any investment decisions made based on this information are at your own risk.