US Treasury yields are approaching the 5% “psychological threshold”! Global bond sell-off has escalated, and financial markets await tonight's CPI “ultimate trial”

The Zhitong Finance App learned that the global bond market is standing at a very symbolic threshold. The benchmark 10-year US Treasury yield hit 4.96% on Friday, the highest level since 2023, and is just one step away from the psychologically significant 5%. Since this week, the yield has increased by 18 basis points cumulatively. The 2-year US Treasury yield, which is more sensitive to the Federal Reserve's policy, once rose to 4.59%, while the 30-year US Treasury yield set a new record high since 2007. A wave of sell-off fueled by soaring oil prices, stubborn inflation, and expectations of interest rate hikes is driving the $32 trillion global US debt market to the center of the storm.

Tonight at 20:30 Beijing time, the US Consumer Price Index (CPI) for August will be announced. This data will determine whether the 10-year US Treasury yield will break through this critical level called the “emotional threshold” by Sam Stovall, chief investment strategist at CFRA Research.

Global bond market resonance: from Sydney to Tokyo, collective yield “breaks ground”

This sell-off is not unique to the US. As the escalating tension in the Middle East pushes up oil prices and heightens concerns about inflation, the global bond market is simultaneously under pressure.

Australia's three-year Treasury yield surged 18 basis points to 5.03% on Friday, the highest since May 2011; 10-year Treasury yields rose 13 basis points to 5.38%. The yield on Japanese treasury bonds is approaching the critical psychological threshold of 3%, and the global yield index has reached its highest level since 2007. Michael Tang, an interest rate strategist at Commonwealth Bank of Australia in Sydney, said, “At present, the lower US CPI and the Federal Reserve's interest rate hike are the only two major factors that may trigger the fuse mechanism. Otherwise, I don't think anyone would want to hold an interest rate position for a long time. There is a lot of hawkish sentiment in the market right now.”

Triple pressure superposition: the “trio” of oil prices, PPI, and finance

The current round of US debt sell-off was a confluence of three shocks that exploded almost simultaneously.

First: oil prices are back above $100. The situation in the Middle East continued to deteriorate. The Houthis occupied important ports in Yemen, and Saudi crude oil production plummeted to 6.2 million barrels per day in August, a sharp drop of 23% from July. Brent crude oil surged 6.3% to $107.63 per barrel in a single day on Thursday, rising further to $109 after the market. Since the CPI data collection period in August, oil prices have continued to rise, which means that inflationary energy pressure has not been fully included in the current data.

Second: PPI rebounded beyond expectations. The August producer price index released on Thursday rose to 5.4% year on year, higher than the forecast of 5.3% and 4.7% last month. July data was revised up, core PPI rose 0.2% month-on-month, and overall PPI rose 0.4% month-on-month in line with expectations. A rise in wholesale prices often indicates that consumer prices will also rise.

Third: Fiscal stimulus promises “add fuel to the fire.” Trump promised at the Dallas Republican Party Midterm Election Conference that if the Republican Party holds both houses of Congress, he will issue a check of 5,000 US dollars to all American adults. According to various media estimates, the total cost of the plan is about 1.2 trillion to 1.3 trillion US dollars, far exceeding the average annual revenue of about 190 billion US dollars from tariffs. More disruptively, the Treasury's expanded repurchase operation on Thursday actually purchased only 5.2 billion US dollars, below the upper limit of 6 billion US dollars, causing the market to seriously question Bezent's ability to stabilize long-term interest rates.

The US Treasury buyback “debut” fell short of expectations, and Bezent faced a severe test

As the bond market continues to be under pressure, US Treasury Secretary Scott Bessent is facing increasingly serious challenges. On Thursday, in the Ministry of Finance's first move to expand the scale of repurchases, the actual number of bonds purchased fell short of market expectations. This result has raised doubts among investors about whether the Ministry of Finance can effectively curb the rise in long-term yields.

Last month, Bezent unexpectedly announced that it would double the size of long-term treasury bond repurchases to at least $4 billion each, in an attempt to curb interest rates on long-term bonds through direct purchases. However, the first scale-up operation on Thursday purchased only 5.2 billion US dollars, below the upper limit of 6 billion US dollars, and became the catalyst for a new round of sell-off.

The 10-year US Treasury yield rising above 5% will put tremendous political pressure on Bezent — he has been trying to stop the sell-off in the bond market until the midterm elections. Fluctuations in yield affect almost all capital costs, including US mortgage interest rates, which have reached their highest level in more than a year. Mortgage interest rates are an important indicator of political importance for American voters who are about to hold midterm elections.

5% “tipping point”: a warning line for a possible collapse of the financial market?

For the $32 trillion US Treasury bond market, a 10-year yield rise above 5% would constitute a systemic shock. This benchmark interest rate directly affects almost all borrowing costs such as mortgages, student loans, and corporate bonds. The average interest rate on a 30-year fixed mortgage has risen to 6.76% this week, according to Freddie Mac data.

Padhraic Garvey, head of American research at Dutch International Group, said: “A 10-year US Treasury yield of 5% seems more inevitable than a prediction. This is a worrying time for the bond market.”

John Higgins, chief economic adviser at KITU Macro, said that the 5% yield level “is viewed by some as a critical point where the financial market may collapse.” He added: “Although we don't think 5% is that 'magic' number, higher Treasury yields would undoubtedly pose a risk to the sustainability of US public finances and threaten the stock market.”

For the $32 trillion US Treasury bond market, the 10-year yield exceeding 5% may trigger multiple chain effects: pressure on stock market valuations, rising corporate financing costs, further cooling of the housing market, and reshaping the global capital flow pattern.

A clear signal has been sent: the “pricing anchor” of global capital markets is undergoing a historic recalibration under the triple pressure of oil prices returning to $100, increased fiscal stimulus, and the testing of the Federal Reserve's credibility.

Stovall warns: “5% is an emotional threshold, and once crossed, investors will become increasingly concerned. This could lead to further weakening of the market.”

CPI becomes the “ultimate judgment”: the probability that the Fed will raise interest rates in September is close to 70%

At 20:30 p.m. Beijing time on Friday, the US Consumer Price Index (CPI) for August will be announced. This is widely regarded by the market as one of the most critical inflation figures in recent years — it will directly determine whether the Federal Reserve will start raising interest rates at the September 16 meeting.

Traders currently price the probability that the Federal Reserve will raise interest rates by 25 basis points in September is about 70%. According to the survey, economists expect the August core CPI, which excludes food and energy prices, to rise by about 0.2% month-on-month. The producer price index released the day before showed that energy prices were once again putting upward pressure on inflation.

Molly Brooks, an American interest rate strategist at TD Securities, believes that higher-than-expected inflation data will boost market expectations for September interest rate hikes and further tightening of monetary policy. Garvey put it bluntly: “A 10-year US Treasury yield of 5% seems more inevitable than a prediction. This is a worrying time for the bond market.”

However, Federal Reserve Chairman Walsh has made it clear that the PCE price index is the official benchmark for measuring inflation. Bank of America senior economist Stephen Juneau estimates that, combined with August PPI data, the core PCE is expected to increase by about 0.26% month-on-month and reach 0.3% after rounding. “If we judge correctly, this will give the green light for the Fed to raise interest rates next week.” Bank of America is one of the most hawkish investment banks on Wall Street and predicts that the Federal Reserve will raise interest rates three times in a row.

Federal Reserve Governor Waller said earlier that if the core CPI rises 0.2% month-on-month, in line with expectations, he will support keeping interest rates unchanged. However, investors are more concerned about Walsh's hawkish statement in Jackson Hole — the extent to which Walsh is concerned about the risk of inflation has made many investors think that he has placed himself in a “must raise interest rates” position. Even if the economy itself does not need to raise interest rates, it may be necessary to maintain the Fed's reputation through action. Ray Remy, vice chairman of Daiwa Capital Markets America, said bluntly: “The bond market makes it very clear that the Federal Reserve will raise interest rates. The bond market won't wait until tomorrow's CPI to make this judgment.”