US 10-year borrowing costs eye 5%, testing Bessent's resolve

The global bond rout pushed U.S. 10-year Treasury yields closer to 5% on Friday, as surging oil prices lifted the chances of an imminent U.S. rate hike and tested Treasury Secretary Scott Bessent's resolve to rein in rising borrowing costs. With government bond yields from Tokyo and Sydney to New York and London at multi-decade highs, traders are bracing for interest rate increases to ward off inflation as oil prices surge beyond $100 a barrel as the Iran war intensifies. That, coupled with nagging worries about high government debt, has piled upward pressure on U.S. yields just as Bessent and the Treasury try to contain rising borrowing costs. Data on Friday showed core U.S. consumer inflation, which excludes food and energy, picked up faster than expected in August, which dented Treasuries. Bessent has overseen his department's decision to double the size of its buybacks of longer-dated securities to at least $4 billion to stem the increase in 30-year Treasury yields, which are at their highest since 2007 and rising. He has also indicated he favours using Washington's monetary might as a foreign policy tool, this week warning traders not to try their hand at pushing the twin levers of the U.S. financial system — the dollar and Treasuries — too far. "I am the house," he told an event on Wednesday, when asked about the Treasury's various recent market interventions, most notably the joint action with Tokyo in late July to buy the yen, but without Japan selling U.S. bonds to do so. Benchmark 10-year yields for the G7 economies have risen by an average of nearly 19 basis points this week, in their worst weekly selloff since the start of the Iran war. Two-year yields, which are more sensitive to shifts in expectations for inflation and interest rates, have risen by an average of 22 bps, with those in big energy importers like Italy and Britain increasing the most. "Once again, it is geopolitical fears driving everything," Deutsche Bank strategist Jim Reid said. The European Central Bank raised rates on Thursday and warned price pressures could prove lasting. Rising yields push up mortgage and lending rates for households and businesses and mean cash-strapped governments must spend more just to pay the interest on their debt. A sustained break for 10-year Treasuries above 5% is seen by some analysts as a critical line that could make bonds more competitive with stocks, potentially pulling dollars out of equity markets. Aside from a couple of brief forays above 5% in late 2023 and in 2006 and 2007, the 10-year yield has not spent any meaningful time above that threshold since 2002. Yields on 10-year Treasury notes rose as high as 4.979%, the highest since late 2023, keeping the mood nervous in other regional markets. Japan's 10-year government bond yields rose 6 bps to 2.97%, with the Bank of Japan widely expected to raise rates to a 31-year high next week and possibly signal faster tightening in the future. In Europe, 10-year German Bund yields have hit their highest since 2011, while French 10-year yields are at their highest since 2008 at roughly 4.46%. Brent crude futures surged to a four-month high of $109.97 a barrel, before retreating to around $104, set for an 8% weekly jump, while European natural gas prices have risen 12% and U.S. diesel has hit $6 a gallon at the pump. Traders are pricing in a nearly 85% chance of the Federal Reserve raising rates next week, up from 49% a week earlier, the CME FedWatch tool showed. The selloff in government bond markets matters because the repercussions ripple through economies. Sovereign debt sets the benchmark for borrowing costs for companies and other loans, including household mortgages. Michael Metcalfe, head of macro strategy at State Street in London, said yields are getting close to the point where they could unleash a selloff in equities. "We've seen a very long run of risk-taking activity on the part of investors. So we've had 108 consecutive days of investors adding to risk across assets. And that's literally just broken this week," he said. Investors are demanding higher returns for holding long-term bonds, rather than shorter-dated debt, to account for the uncertainty around interest rates, inflation and growth. "That will continue to pressure this idea that the officials are trying to lean against it, but the fundamentals haven't changed," Metcalfe said.

US 10-year borrowing costs eye 5%, testing Bessent's resolve

U.S. 10-year Treasury yields edge toward 5%

Bessent's interventions and global yield surge

Bond selloff ripples through markets and rate expectations

5% threshold in focus as crude jumps and Fed bets rise

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