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FollowingCore Points
- Affected by the release of inflation data in August, the benchmark U.S. 10-year Treasury yield exceeded the psychological barrier of 5% for the first time.
- The consumer price index (CPI) in August was flat at 3.4% year-on-year, while the core monthly inflation rate excluding food and energy was expected to be 0.2%, but actually recorded 0.3%, exceeding market expectations.
- Data shows that the probability of the Federal Reserve raising interest rates at the September 15-16 policy meeting rose to 88%.
- Brent crude oil prices remained near US$109 per barrel after achieving a sharp weekly gain of nearly 13% due to geopolitical tensions.
- If yields continue to exceed 5%, it will push up mortgage costs, suppress stock valuations, and tighten overall financial conditions.
In-depth analysis of inflation data
The U.S. 10-year Treasury yield exceeded the psychologically significant 5% mark on Friday, hitting that threshold for the first time since 2024. The change came after the release of August inflation data, which showed inflation was higher than consensus expectations, prompting traders to significantly increase their bets on an upcoming Federal Reserve interest rate adjustment this month.
At the instant the Labor Department released the Consumer Price Index (CPI) data, the benchmark yield soared from 4.942% to 5.005%.
The annual consumer price index for August remained unchanged at 3.4%. At the same time, the monthly core CPI reading, which excludes volatile food and energy components, was 0.3%, exceeding the consensus forecast of 0.2%. This was followed by producer price index (PPI) data released on Thursday, showing a 5.4 percent increase, which also exceeded analysts 'forecasts. Rising energy prices are rapidly being transmitted through production and distribution networks.
Brent crude, the global oil benchmark, was anchored at around US$109 per barrel, completing a stunning weekly gain of about 13%. Armed conflicts affecting shipping routes in the Strait of Hormuz and the actions of Houthi forces in the Red Sea Corridor have restricted oil shipments from major oil-producing countries.
Market pricing of Fed actions
In the immediate aftermath after the release of inflation data, interest rate futures contracts showed that the probability of the Fed raising interest rates by 25 basis points during the September 15-16 policy deliberations was 88%, a significant increase from the 71% probability calculated earlier in the trading day.
The European Central Bank implemented a 0.25 percentage point rate hike on Thursday, raising interest rates to 2.50%, fueling the trend of global monetary tightening. Short-term two-year Treasury yields, which are more sensitive to the upcoming Fed policy changes, rose to 4.61%. The yield on the long-term 30-year Treasury note climbed to 5.338%, its highest reading since 2007.
The sell-off in fixed-income securities resonates internationally. Australia government bond yields have reached levels unseen since 2011. Japan's sovereign yield is approaching the 3% mark.
Padhraic Garvey, head of Americas research at ING Group, said: "At this stage, a 10-year yield of 5% seems more like a certainty than just a forecast."
The economic impact of a 5% Treasury yield
When the 10-year yield exceeds 5%, it increases borrowing costs across the economy. Mortgage interest rates, corporate debt refinancing costs and consumer loan interest rates are all linked to the trend of Treasury yields.
In addition, it reduces equity risk premiums and makes fixed-income securities more attractive than equity investments.
John Higgins of Capital Economics pointed out: "While we still doubt whether 5% represents some kind of 'magic' threshold, high Treasury yields will undoubtedly pose challenges to U.S. government fiscal sustainability and could weaken the stock market."
For Treasury Secretary Scott Bessent, a prolonged period of above 5% could create political headwinds as the midterm elections approach, especially since mortgage rates have peaked for more than a year.
The Federal Reserve policy meeting scheduled for September 15-16 has become the focus of market attention.
