The global bond market is experiencing a "perfect storm"! The 10-year US Treasury yield broke 5%, reaching a new high since 2007; Japanese and South Korean stock markets fell across the board; and Brent crude oil prices rose nearly 2%.

The global bond market is experiencing a "perfect storm"! The 10-year US Treasury yield broke 5%, reaching a new high since 2007; Japanese and South Korean stock markets fell across the board; and Brent crude oil prices rose nearly 2%.

The yield on the 10-year U.S. Treasury note broke through the 5% mark, reaching its highest level in nearly two decades. Global bond markets are facing a triple whammy of soaring oil prices, expanding government debt, and a surge in artificial intelligence financing . This landmark breakthrough not only caused a simultaneous decline in Asian stock and bond markets but also focused market attention on the Federal Reserve's interest rate decision on Wednesday—a potentially crucial juncture in determining the bond market's direction.

The yield on the 10-year U.S. Treasury note rose as much as 4 basis points to 5.02% on Tuesday, surpassing the 2023 high and reaching this level for the first time since 2007. The immediate trigger for this surge was higher global oil prices—Brent crude rose 1.6% to around $107.30 per barrel, and a key Saudi oil pipeline remained shut down after an attack, further escalating supply risks in the Middle East.

Meanwhile, the yield on 30-year Japanese government bonds rose 5.5 basis points to 4.12%, and the yield on 10-year Australian government bonds surged 9 basis points to 5.42%, indicating that the global bond market sell-off has no clear boundaries. The bond market turmoil quickly spread to other asset classes. Asian stock markets fell 0.6% overall, with Japan's Topix index down 0.7%, South Korea's KOSPI index falling more than 1.5% at one point during the session, and Australia's ASX 200 index down 1%; US stock futures also weakened, with S&P 500 futures down 0.3%.

In addition to bond market pressures, the controversy surrounding AI regulation is also simultaneously affecting market sentiment. Global stock markets generally declined on Monday following warnings from leading AI companies—several AI developers called for a slowdown in the pace of technological advancement to prevent AI from spiraling out of control and causing catastrophic harm. US President Trump subsequently publicly criticized Anthropic CEO's stance, further exacerbating policy disagreements surrounding AI regulation.

Berenberg strategist Chris Armstrong said, "The market was already quite nervous, and if major players start to indicate that they need to apply the brakes, it will only exacerbate the uncertainty."

Trends in major global markets:

Stock Markets: S&P 500 futures fell 0.3%; Japan's Topix fell 0.7%; Australia's ASX 200 fell 1%; Europe's Stoxx 50 futures were essentially unchanged.

Bond Market: The yield on the 10-year U.S. Treasury note rose 3 basis points to 5.02%; the yield on the 10-year Japanese government bond rose 2.5 basis points to 3.020%; the yield on the 30-year Japanese government bond rose 5.5 basis points to 4.12%; and the yield on the 10-year Australian government bond rose 9 basis points to 5.42%.

Commodities: West Texas Intermediate crude rose 1.8% to $103.17 a barrel; Brent crude rose 1.6% to about $107.30 a barrel; spot gold was basically unchanged at about $4,300 an ounce.

Foreign exchange: The Bloomberg Dollar Spot Index rose 0.1%; the euro fell 0.1% to $1.1536; the yen fell 0.3% to 154.75 against the dollar; and the Australian dollar fell 0.3% to $0.7121.

Cryptocurrencies: Bitcoin fell 1.9% to $77,584.98; Ethereum fell 3.1% to $2,491.97.

Triple pressures drive bond market sell-off

This round of global bond market sell-off is not caused by a single factor, but is the result of multiple structural pressures.

According to Bloomberg, since the US military action against Iran in late February, oil and gas supplies in the Middle East have been continuously disrupted, leading to a sustained rise in global bond yields. Rising oil prices have directly reinforced inflation expectations, causing bondholders to demand higher yields.

At the same time, companies have taken on massive debt to fund AI spending, injecting a large amount of debt supply into the market and further stimulating the already strong US economy, creating a double disadvantage of "increased supply and suppressed demand".

Government debt issuance continues to expand globally—both to refinance maturing bonds and to cover fiscal deficits—while central banks have exited quantitative easing bond-buying programs, traditional buyer demand has cooled, and the market's reliance on price-sensitive investors has increased significantly.

Phoebe White, head of U.S. interest rate strategy at UBS, said,

"Given that the real economy has not shown signs of weakness, and the supply and demand dynamics of the US Treasury market are quite different from those in 2007, the downside potential for long-term yields is quite limited. The structural demand for US Treasuries from traditional buyers such as foreign official investors has clearly weakened."

It is worth noting that analysts point out that the yield on 10-year US Treasury bonds has broken through 5%, which is shaking the valuation logic of the stock market.

Grace Peters, global head of investment strategy at JPMorgan Private Bank, said, "If bond yields rise to 5% or even 5.25%, I think the stock market will experience significant digestive issues. The 5% figure has a significant psychological impact."

Bloomberg market strategist Mark Cranfield points out that the widening divergence between crude oil and gold means macro traders may need to grapple with a breakdown in cross-asset class correlations for a longer period. "They are losing confidence in some kind of 'circuit breaker' that can suppress oil prices and restore market risk appetite."

The Federal Reserve's decision becomes the focus of the market.

Wednesday's Federal Reserve interest rate decision is currently the biggest source of uncertainty in the market. Traders are currently pricing in a probability of over 90% for a rate hike.

BMO Capital Markets strategist Vail Hartman said, "If the Fed keeps rates unchanged this week, it will be extremely difficult to avoid damage to its credibility as an inflation fighter. The market is not only highly sensitive to unexpected rate cuts, but also equally vulnerable to 'dovish rate hikes' that convey a more patient signal through the dot plot or press conference."

In a research report, Xiao Cui, senior economist at Pictet Wealth Management, pointed out that Federal Reserve Chairman Warsh had lowered the threshold for raising interest rates at the Jackson Hole conference. If interest rates are not raised this time, it will damage institutional credibility and further push up long-term yields.

"Therefore, we expect Warsh to deliver a hawkish signal at the press conference—not to exceed market expectations of the rate hike path, but to reinforce the Fed’s commitment to maintaining price stability and to provide an anchor for long-term yields."

"There are currently a lot of deep factors supporting continued interest rate increases, and this is the path of least resistance," said Zach Griffiths, head of investment grade and macro strategy at CreditSights. He expects the 10-year yield to potentially rise further towards 5.5%.

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