High inflation, short U.S. Treasuries! Expectations of "Fed rate hikes" are rising, and "bond veterans" predict "the 10-year U.S. Treasury yield will surpass 5% this year."

High inflation, short U.S. Treasuries! Expectations of "Fed rate hikes" are rising, and "bond veterans" predict "the 10-year U.S. Treasury yield will surpass 5% this year."

US inflation data has strengthened again, and the US Treasury market has encountered a new round of sell-offs.

According to WallstreetCN, data released by the US Department of Labor on Tuesday showed April CPI accelerated due to rising oil and food prices, fueling expectations that the Fed will maintain high interest rates for a long time, or even raise rates again.

According to CME FedWatch tool, financial markets are now pricing in a probability of over 30% for a 25 basis point rate hike in December, a significant jump from 21.5% the previous trading day.

(Probability of 25 bp rate hike in December rises to 30.6%)

Traders are rapidly rebuilding short positions in US Treasuries. "Bond veteran" Steven Barrow, Head of Strategy at Standard Bank, even predicts that the yield on 10-year US Treasuries will break 5% this year, more than 50 basis points above current levels and over 80 basis points above Bloomberg strategists' year-end forecasts.

Kelsey Berro, Fixed Income Portfolio Manager at JP Morgan Asset Management, noted that the current market pricing logic is: the economy remains resilient, and the Fed can stay put for a fairly long time.

Shorts Rebuild Quickly, Pressure Especially High on the Short End

The US Treasury market has encountered a new round of sell-offs.

On Monday, yields across major maturity US Treasuries rose about 5 basis points. The 5-year yield further consolidated above 4%, triggering a rapid accumulation of short positions.

30-year Treasury yield surged back above 5.00%.

Customer survey by JP Morgan as of May 11 shows that bearish sentiment in the treasury market is rising, with investors' short positions reaching a 13-week high. Citi strategist David Bieber commented:

Bearish sentiment is regrouping as yields climb; the SOFR front end and curve belly are both increasing short risk exposure.

John Briggs, Head of North America Rate Strategy at Natixis, noted that the war continues, and the duration and severity of the inflation shock remain unknown. He said:

If the war issue is resolved, we can estimate when pressures will ease. But if not, the tail risk lengthens every day, reducing the likelihood of rate cuts and increasing the risk of oil-driven inflation spreading across other sectors.

Rate Hike Expectations Reignite, Option Markets Accelerate Hedging

In the Secured Overnight Financing Rate (SOFR) option market, traders are actively seeking to hedge against the risk that more rate hike expectations could be priced in over the coming weeks.

As a market tightly linked to Fed policy expectations, Monday's trading saw demand for bearish options pricing in two rate hikes before the end of 2026.

From the current option position structure, the distribution of major maturity contracts shows clear differentiation:

September contract (driven by call options)：The 96.50 strike price currently has the highest position concentration in the market.In SOFR options, call options represent pricing for rate cut paths showing that a significant volume of rate cut expectations remains in the September contract.

December contract (driven by put options):The position size at the 96.0625 strike has recently increased.In SOFR options, put options represent defensive positioning against high interest rates or rate hike risk,96.0625 corresponds to an implied rate of about 3.9375%, reflecting that some funds are hedging against risk of year-end inflation rebound or underwhelming rate cuts.

JP Morgan's Berro noted:

The market has been very efficient in repricing the reality of 'longer high inflation,' which is largely a direct response to rising energy prices.

"Bond Veteran" Bets on 10-Year Yield Breaking 5%

While most strategists keep year-end targets for 10-year Treasury yields in the 4% to 4.5% range, the "bond veteran" is predicting a break of 5% this year.

Steven Barrow of Standard Bank sticks to his early-year forecast: 10-year yield will break 5%, hitting a key psychological barrier not persistently breached since 2007.

On Wednesday, the 10-year yield was about 4.462%, significantly higher than the 3.94% prior to US and Israel strikes on Iran.

Barrow said global energy market disruptions caused by the Middle East war have strengthened his view, but they are not the starting point—"The view is not dominated by the war, only strengthened by it."

Barrow cited multiple supply-side inflation drivers, including global supply chain pressures, ongoing climate change, and labor supply restriction from tighter immigration policies.

He believes the Fed policy stance may be too loose and is pessimistic about the government's appetite for fiscal consolidation.

Barrow admits the forecast is far from market consensus and partly attributes it to his independent research style. He remarked, large research teams often require lengthy debate to adjust forecasts, prone to 'mean reversion bias,' causing predictions to be more conservative and smoother.

If the 10-year yield truly breaks 5%, the impact will go far beyond just the bond market. Barrow notes this will intensify concerns about US debt sustainability, push up global corporate borrowing costs, and may trigger a shift of funds from equities to bonds.

Currently, the 10-year yield has not effectively broken 4.5% this year, and the 30-year Treasury often attracts contrarian buying near 5%. Barrow does not see this as a top signal:

The market can stabilize near 4.5%; just because 5% hasn't been sustained in the past doesn't mean it can't be in the future.

For bond bulls and some policymakers citing AI as a major productivity booster—implying room for looser monetary policy—Barrow remains distinctly skeptical.

He says, having experienced several "much-hyped, under-delivered" tech revolutions, he is reluctant to overprice this narrative.

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