The bond selloff has driven a key Treasury yield to the verge of 5%, worsening angst from Wall Street to Washington about higher borrowing costs hitting the US economy.
After surging oil prices threatened to deliver a fresh inflation shock and the Trump administration unsuccessfully tried to ease the pressure on the government debt market, the benchmark 10-year yield jumped to 4.97% by the end of last week. That’s just shy of the peak in October 2023, when it climbed over 5% briefly during a single trading session, before coming back down as buyers rushed in.
The recent rout has increased the stakes for Federal Reserve Chairman Kevin Warsh going into the central bank’s meeting on Wednesday. The market steadied on Friday only after data showed a stronger-than-expected rise in consumer prices last month, strengthening speculation that policymakers will start raising interest rates to tame inflation that’s exceeded its target for half a decade.
“The Fed is behind the curve, definitely,” said Tracy Chen, a portfolio manager with Brandywine Global Asset Management. “Yields are heading higher in the medium-term.”
She said that’s because some of the factors pushing longer-term yields higher, like the inflationary impacts of the Iran war, aren’t in policymakers’ control. “How high I don’t know, but I think definitely beyond 5%.”
Bond yields have been rising globally since President Donald Trump launched his war on Iran in late February, disrupting the supply of Middle Eastern oil and gas. In the US, the artificial-intelligence boom, which is both flooding markets with debt and pouring stimulus into the economy, and concerns about the federal government’s swelling deficit have also played a role.
The upward move has vexed Trump as it ripples through markets, driving up the cost of mortgages and other loans ahead of the mid-term elections in November.
Early this month, he threatened to cut off all US trade with some countries if the Fed didn’t reduce interest rates, a step that would almost certainly worsen the selloff by fanning inflation fears. Treasury Secretary Scott Bessent tried to restrain the rise in bond yields by increasing the department’s debt buybacks, only to see them spike last week after his first such operation underwhelmed investors.
With little progress toward ending the conflict in the Middle East, investors are bracing for the risk that the bond-market rout will continue. Ian Lyngen, head of US rates strategy at BMO Capital Markets, said he’s anticipating that 10-year yields will breach 5% “in very short order.”
There’s nothing inherently significant about crossing that level, which it hasn’t closed above since 2007. But such round numbers are often seized on as key pivot points that can catalyze decisions by investors and policymakers.
Treasury yields are particularly important because they serve as a baseline for other loans. In the stock market, they’re also used as a discount rate to gauge the present value of profits expected in the years ahead. The more yields rise, the smaller those earnings look.
Some investors say that could start exerting a drag on stocks, which have been hovering near record highs because of the strong profits thrown off by the AI boom and the resilience in the economy. Moreover, elevated bond yields could trigger a shift away from equities as investors are lured into bonds by the higher payouts.
“If you saw bond yields move to the 5% or 5.25% level I think that’s where you will see some indigestion from the equity market,” said Grace Peters, global head of investment strategy at JPMorgan Chase Private Bank. “5% psychologically has an impact.”
What Bloomberg strategists say...
“Inflation is still uncomfortably above target and the federal government is financing large deficits into an already heavy supply environment. If nominal activity stays around current levels while the Fed has tacitly accepted 3% inflation as 2%, long rates simply must go higher.”
—Brendan Fagan, Macro Strategist, Markets Live.
The turmoil of the past week — when two-yield Treasury yields saw the biggest one-day jump since Trump’s April 2025 tariffs sent markets into a tailspin — has increased pressure on the Fed.
That’s because some of the selling in recent months has been stoked by questions about Warsh, who used his first post-meeting press conference in June to drive home a message that he was focused on getting inflation back to the central bank’s 2% target. But after the meeting in July, when the Fed again kept rates unchanged, traders dumped longer-dated bonds on doubts about whether he’d follow through.
On Friday, after the Labor Department reported a larger-than-expected jump in a core inflation measure, traders wagered that it would likely force the Fed’s hand. Futures started pricing in a roughly 90% chance that it will raise its overnight benchmark rate by a quarter percentage point after the upcoming meeting.
US Treasuries steadied on Monday despite continued losses in European and UK bonds. The US two-year yield held at 4.63% in the London session, while the 10-year rate was slightly up at 4.96%.
“The more that the Fed can show its inflation fighting credibility, the more likely it’ll compress the risk premium on the back end of the Treasury curve over the medium term,” said Daleep Singh, chief global economist at PGIM Credit.
Even so, some of the other forces that have been pushing up yields are continuing unabated. The federal deficit hit $2 trillion during the first 11 months of the fiscal year. And last week Trump raised the prospect of spending more than $1 trillion by sending out $5,000 checks to every American adult if Republicans keep control of Congress after the upcoming elections, which the White House’s economic adviser said was a “serious proposal.” The conflict in the Middle East has also escalated, sending oil prices to a four-month high.
JPMorgan Chase & Co. strategists led by Jay Barry said they see a rate hike as likely this week, but “skew bearishly” toward long-end Treasuries due to the ways traders could react to the Fed’s statement and Warsh’s press conference. Others echoed the caution, seeing risks that the selloff could resume if the Fed surprises investors.
“The selloff in the long end, if the Fed does not hike, could potentially become much more disorderly,” said Ed Al-Hussainy, a portfolio manager at Columbia Threadneedle.
