US 10-Year Treasury Yields Rise to Highest Level Since 2007

(Bloomberg) -- The 10-year US Treasury yield rose to the highest level in almost two decades, the latest milestone in a bruising global bond selloff driven by surging energy prices, mounting debt and inflation.

The yield rose as much as four basis points to 5.02% on Tuesday, surpassing a peak from 2023 to hit the highest since 2007. The latest leg of the move followed an increase in global oil prices as risks to Middle East supplies grow.

The bond slump raises the stakes ahead of the Federal Reserve's interest-rate decision on Wednesday, where investors expect officials to raise short-term borrowing costs for the first time since July 2023. If they don't hike, or if Fed Chairman Kevin Warsh signals less monetary tightening in coming months than what's priced in by money markets, then bond investors may demand even higher yields to protect against inflationary risks.

"It would be very difficult for the Fed to leave rates unchanged this week without eroding its inflation-fighting credibility," said Vail Hartman, a strategist at BMO Capital Markets. "The market is vulnerable to not only an unexpected hold, but also a dovish hike that entails a more patient takeaway from the dot-plot or press conference."

Bond yields have been rising globally since the US and Israel launched an assault on Iran in late February, disrupting the supply of Middle Eastern oil and gas. That's on top of other factors such as massive corporate borrowing to fund artificial intelligence spending, which is both flooding markets with debt and pumping stimulus into an already resilient US economy.

It also comes as the amount of debt governments issue continues to rise, both to refinance maturing bonds and to fund deficit spending. Central banks are no longer hoovering up government bonds as part of their quantitative easing programs, and demand from other traditional buyers is cooling — resulting in a greater reliance on more price-sensitive investors.

"The scope for long-end yields to fall is somewhat limited given that we don't see signs of weakness in the real economy and supply/dynamics in the Treasury market are very different relative to 2007," Phoebe White, head of US rates strategy at UBS Group AG, said via email. "Structural demand for US Treasuries, particularly among foreign official investors, is materially weaker."