Global bond selloff pushes borrowing rates higher

US long-dated Treasury yields soared to their highest levels in over two decades on September 24, amplifying a global sell-off driven by concerns that escalating energy costs, robust economic growth, and increased government spending would keep inflation elevated. This trend has been ongoing for months, with bond markets experiencing pressure as the Iran conflict drives up energy prices and investors grapple with government spending.

As yields rise, bond prices fall, causing increasing concern among investors who are closely watching the US, the world's largest and most influential bond market. The 30-year Treasury bond yield hit 5.48 percent, the highest mark since 2004, while the benchmark 10-year yield climbed to 5.20 percent. Investor anticipation of yields surpassing 6 percent, a level not seen in recent decades, has been fueled by the resilience of economic growth, soaring corporate profits, and a surge in spending, particularly in the technology sector, which pushed the Nasdaq to a record high on September 22.

The 10-year yield's increase of 0.70 percentage point since the Federal Reserve's June policy meeting and 1.25 percentage points since early March has drawn attention to the potential impact on consumers, with mortgage rates now 1 percentage point higher than before the war and nearing their highest levels in two years. The Federal Reserve's recent business activity data, indicating strong US growth and rising inflation pressures, has heightened the likelihood of additional rate hikes.

Experts attribute the majority of the recent yield increase to Fed expectations, with growth expectations and higher oil prices contributing to the remainder. The 30-year yield reflects investors' willingness to finance government borrowing in the years ahead, signaling a reevaluation of several factors, including resilient US economic growth, which creates a more positive outlook for risk-free rates.

Economies worldwide are coping with higher borrowing costs driven by increased spending demands. Germany, for example, anticipates federal borrowing to reach a record €525.5 billion (S$765 billion) in 2026 and to continue rising, largely due to refinancing needs and expanding special funds requirements. Japan's 10-year bond yield also hit a 17-year high.

The US Treasury Secretary has employed various measures to curb rising borrowing costs, but yields have continued to climb. The US leads Group of Seven countries in yields, with New York Federal Reserve President John Williams noting that the US economy is showing "remarkable resilience." The question remains: how high can treasuries rise?