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FollowingThe benchmark 10-year U.S. Treasury yield briefly hit 5.36%, before falling back, and market volatility intensified.
The benchmark 10-year U.S. Treasury yield briefly climbed to about 5.36%, before falling back. This trend reflects the current market turmoil, and the quarterly increase in yields this year has hit the largest record since 1994.
According to official Treasury data, the yield on the 10-year U.S. bond closed at 5.22% on October 8, after closing at 5.28% the previous day.
Multiple pressures behind the surge in U.S. bond yields
Bond prices and yields have a reverse relationship. When investors dump existing government bonds, bond prices fall, pushing up yields.
The recent sell-off wave reflects multiple intertwined stress factors. On the one hand, rising oil prices have revived market concerns about inflation and weakened expectations of monetary easing in the short term; on the other hand, Washington, D.C.'s huge financing needs have increased the supply of government debt. This combination forces investors to demand higher returns to hold long-term securities.
The recent sharp expansion of U.S. debt has exacerbated these concerns, especially the rising proportion of interest expenditures in total federal spending, making the fiscal burden increasingly heavy.
In addition, higher yields also have an impact on the stock market. Investors can now make yields of more than 5% on risk-free U.S. bonds, making it difficult for high stock valuations to be reasonably supported. This pressure has a particularly significant impact on technology stocks, because the valuations of many technology companies rely on expected earnings many years later, and in a high interest rate environment, the discounted value of future cash flows will shrink significantly.
Strong demand complicates the sell-off
Despite market turmoil, U.S. bond auction results show that demand for U.S. Treasuries remains strong. Thursday's $22 billion auction of 30-year bonds attracted solid buying, despite the final issue yield of 5.618%, the highest level since 2000. This result helps drive down long-term yields.
Meanwhile, bond funds attracted approximately US$26.4 billion in net inflows in the five days ended October 1, indicating that higher yields are attracting investors seeking income. This trend supports the view that valuations of U.S. debt are becoming increasingly attractive despite short-term losses.
The future direction of bonds and stock markets
A Reuters survey of nearly 60 fixed-income strategists showed that the yield on 10-year U.S. bonds is expected to fall back to around 5.00% before the end of the year. However, continued inflationary pressure and government borrowing demand may keep yields high.
For the stock market, the consequences are already evident. The latest round of stock market correction coincides with increased volatility in the bond market and higher energy prices.
