Will the 30-year yield break 6% this month? Economic resilience and inflationary pressure are driving up interest rates, and the wave of sell-offs of US bonds has further intensified

The Zhitong Finance App learned that US Treasury bonds were sold off again on Monday, and long-term US bond yields rose to a new high in decades. As the US economy continues to expand, AI infrastructure investment is booming, and inflationary pressure is still high, investors are increasingly cautious about whether US bond yields have peaked.

On Monday, US 10-year and 30-year Treasury yields both rose by at least 7 basis points, to 5.34% and 5.7% respectively, both hitting their highest levels since 2002; short-term US Treasury yields rose by about 2 to 4 basis points. Since mid-August, US bond yields have continued to rise. On the one hand, the market needs to absorb capital demand brought about by strong economic growth and AI investment. On the other hand, high inflation also makes it difficult to rule out the possibility that the Federal Reserve will raise interest rates further.

Earl Davis, head of fixed income at BMO Asset Management, said on Monday that it is “inevitable” that US 30-year Treasury yields will rise above 6%, and it is likely to happen this month. If this prediction comes true, the 30-year US Treasury yield will reach levels not seen since 2000. Davis believes that current fluctuations in the bond market are forming a cycle that pushes interest rates to rise further, causing long-term yields to continue to face upward pressure.

Meanwhile, the US service sector data released on Monday further strengthened the bond market's cautious sentiment. According to ISM service industry data for September, the expansion rate of the US service sector has slowed down, but price pressure is clearly heating up. Among them, the payment price index rose to 74, which not only exceeded market expectations, but also hit the highest level since July 2022.

BMO capital market strategist Vail Hartman said that the overall report shows that inflationary pressure is increasing while nominal economic growth is still strong, further strengthening the core factors that have continued to suppress the bond market over the past few weeks.

As US bond yields have continued to rise recently, it is becoming more and more difficult for the market to determine where the top of long-term interest rates is. The US economy continues to expand, and the boom in AI infrastructure construction is driving corporate capital expenditure growth. At the same time, price pressure in the service sector is heating up again, which means that the process of falling inflation may still be tortuous. These two factors together support the market's expectation that interest rates may remain high for a longer period of time.

According to the interest rate swap market, traders currently expect the probability that the Federal Reserve will raise interest rates at the October meeting to be about 25%, and the expectation that the interest rate will be raised by 25 basis points at the latest at the December meeting has been taken into account.

Therefore, even if the market's bets on the Fed's immediate action in October are low, investors still expect the possibility of further tightening monetary policy in the coming months. For long-term US debt, strong growth, inflationary stickiness, and potential interest rate hikes all put pressure on it.

A series of US Treasury bond auctions to be held this week will also be an important window for observing investors' acceptance of current high yield levels. The US Treasury interest-bearing bond auction cycle will begin on Tuesday, starting with a $58 billion 3-year treasury bond auction. Subsequent 10-year and 30-year treasury bond auctions attracted more market attention, because with long-term yields continuing to reach new highs for many years, auction demand will directly test whether investors are willing to increase their holdings of long-term US Treasury bonds at current price levels.

If demand for long-term bond auctions weakens, it may further exacerbate market concerns about long-term US bond supply and demand; conversely, if high yields attract strong purchases, it may provide some support for the bond market, which has continued to be under pressure recently.