Key Takeaways:
The global bond selloff pushing 30-year US Treasury yields to a 19-year high stems from fiscal supply and central bank policy shifts, not inflation.
The global bond selloff pushing 30-year US Treasury yields to a 19-year high stems from fiscal supply and central bank policy shifts, not inflation, as investors demand higher compensation for government debt and AI-driven capital competition.
"No single trigger explains it, but rather a mix of confusing Fed communication, a fight for capital between the AI capex super-cycle and elevated public deficits, and solid global data," said Thomas Hempell, head of macro and market research at Generali Asset Management.
Japan's 10-year yield hit 3 percent for the first time since 1996, Britain's 10-year yield rose above 5.24 percent to its highest since 2008, and Germany's 10-year yield reached 3.36 percent, a 15-year high. The 10-year US Treasury yield climbed to 4.79 percent, its highest since early 2025, while the S&P 500 fell 0.4 percent and Brent crude rose 2 percent to $92.20 as renewed US-Iran fighting closed the Strait of Hormuz.
The repricing carries broad consequences: higher yields raise borrowing costs for governments and corporations, pressure equity valuations, and complicate the Fed's path. Traders now price a 65 percent chance of a Fed rate hike in September, up from 40 percent a week ago, with the ECB and BoJ also expected to tighten this month.
The selloff's root cause sits on the supply side of the bond market. The US national debt surpassed $40 trillion two weeks ago, and persistent deficits mean the Treasury must issue more long-dated paper. Treasury Secretary Scott Bessent's plan to at least double long-dated bond repurchases amounts to a tactical yield cap rather than a structural fix, according to Generali's senior bond strategist Florian Späte. The program clashes with Fed Chair Kevin Warsh's preference for a leaner balance sheet and less forward guidance, blunting its market impact.
The "fight for capital" is intensifying. Hyperscalers are issuing large amounts of long-duration debt to fund AI infrastructure, competing directly with government supply. "The higher yields go, the bigger strain it provides to this particular sector, which is one of the largest growth drivers of equity markets," said Aneeka Gupta, senior strategist at WisdomTree. Microsoft fell 1.3 percent and Advanced Micro Devices fell 2.4 percent on Tuesday as tech stocks bore the brunt of the repricing.
The dollar has absorbed part of the adjustment. Bessent's buyback program shifts price pressure from bonds to the currency: if authorities cap yields, foreign investors demand a cheaper entry point to keep buying US paper. The dollar failed to recover even as bonds pared initial gains, according to Generali's currency strategists, who see EUR/USD tilted toward 1.18 by year-end.
Central bank dynamics compound the pressure. Warsh's hawkish Jackson Hole speech last week led traders to raise bets on US rate hikes, with CME FedWatch showing a 66 percent probability of a September move. July core PCE inflation rose 3.3 percent year over year, and Warsh cited the insufficient pace of disinflation while reiterating the commitment to the 2 percent target.
The ECB is widely expected to hike on Sept. 10, with markets pricing nearly three more hikes in this cycle. July inflation came in at 2.9 percent headline and 2.5 percent core, while energy prices remain elevated with European gas climbing toward its highest since early 2023. The BoJ is expected to raise rates at its Sept. 18 meeting as inflation reaccelerates and the yen weakens despite coordinated intervention.
The last time Japan's 10-year yield traded at 3 percent was in 1996, before the country's deflationary spiral took hold. The current rise reflects a different dynamic: ambitious fiscal expansion and rising inflation expectations, not the deflation that defined three decades of Japanese bond markets. "There is now something of a sense of resignation — tinged with helplessness — about rising interest rates," said Ryutaro Kimura, senior strategist at BNP Paribas Asset Management in Tokyo.
If the Fed hikes in September, the 10-year Treasury yield could push toward 4.80 percent in six months, according to Generali's forecasts. If August CPI and PPI prints, due before the Sept. 16-17 FOMC meeting, surprise to the downside, the repricing could reverse. "I think the Fed hikes in September, and I think it's the beginning of the three-rate hike cycle at minimum," said Andrew Lilley, chief rates strategist at Barrenjoey.
This article is for informational purposes only and does not constitute investment advice.
