Under continuous pressure from inflation and interest rate hike concerns, US Treasury sell-off intensifies; 30-year yield once surpassed 5.6%, hitting a more than 24-year high

According to Zhihui Financial APP, U.S. long-term Treasury yields continued to climb on Tuesday, extending the recent sharp upward momentum. Driven by multiple factors such as inflationary pressures, Federal Reserve monetary policy, as well as increases in the U.S. fiscal deficit and Treasury supply, long-term U.S. Treasuries have faced sustained sell-off. The 30-year Treasury yield at one point rose above 5.6%, reaching its highest level since June 2002.

As of this report, the 30-year Treasury yield was up over 2 basis points to 5.585%, having intraday climbed to just above 5.6%. The last time a similar level was reached was back in June 2002, when the 30-year Treasury yield hit 5.644%.

Serving as a key benchmark for borrowing costs such as U.S. mortgages and auto loans, the 10-year Treasury yield rose about 1 basis point to 5.253%. In contrast, the 2-year yield, which is more sensitive to short-term Federal Reserve rate policy, fell more than 3 basis points to 4.891%, indicating that the yield curve steepened further on the day.

Inflation, Fiscal Deficit, and Treasury Supply Exert Pressure, Long-Term Term Premiums Rise

JoAnne Bianco, Senior Investment Strategist at BondBloxx Investment Management, said investors remain highly focused on inflation and are increasingly worried about the U.S. fiscal deficit and the large supply of Treasuries. These factors are driving the market’s view that holding long-term Treasuries should compensate with a higher term premium.

Recently, yields on long-term Treasuries have quickly surged to multi-year highs, largely due to continued inflation pressures. The ongoing seven-month Middle East conflict is still supporting energy prices, and persistently high energy costs have further fueled concerns over rising prices. At the same time, rising U.S. government debt is causing investors to pay closer attention to future Treasury issuance scale and the long-term fiscal outlook.

Long-term treasuries are normally more sensitive to inflation expectations and fiscal conditions. When investors are concerned that inflation will remain elevated for a prolonged period or that a widening fiscal deficit will increase Treasury supply, they usually demand higher yields as compensation for holding long-term bonds.

U.S. and Iran Seek Mediation as Middle East Situation Continues to Influence Treasury Market

Geopolitical tensions have also become an important variable for U.S. Treasuries. According to reports, the U.S. and Iran have each held talks with mediators, seeking resolution to the ongoing Middle East conflict. This has kept the market’s attention focused on the possibility of the situation easing.

However, until energy prices fall significantly, the market is still concerned that high oil prices will continue to drive U.S. inflation and force the Federal Reserve to maintain a tighter monetary policy stance.

This means long-term Treasuries are under dual pressure: on one hand, rising energy prices may make inflation even more stubborn; on the other, if the Federal Reserve needs to raise interest rates further, investors’ expectations for the future rate path will also move higher.

Expectations of Another Rate Hike in October Rise; Market Bets Exceed 72%

As concerns over inflation continue to heat up, traders are further increasing their bets that the Federal Reserve will raise interest rates again. According to the CME FedWatch tool, the market currently sees the probability of a rate hike at the next Federal Reserve policy meeting in October as now exceeding 72%.

Earlier this month, the Federal Open Market Committee (FOMC) voted unanimously, by 12 to 0, to raise the benchmark interest rate by 25 basis points. Now, persistently high energy prices and continued inflation pressures are leading investors to bet that the Federal Reserve may continue tightening policy.

It is worth noting that on Tuesday there was a marked divergence in performance across different Treasury maturities. The 2-year yield fell, while 10-year and 30-year yields continued to rise, indicating that recent market pressure is more concentrated at the long end.