The yield on the US 10-year Treasury fell about 3 basis points to 5.17% after rising over 20 basis points in two consecutive trading days. A global bond sell-off had previously pushed US Treasury yields to decades-high levels, with the 10-year reaching its highest range since 2007 and the 30-year briefly hitting its highest point since 2004.

This round of increases was driven by multiple factors: stronger-than-expected US manufacturing and composite PMIs for September, input prices rising to near four-year highs, reinforcing the pricing for further Fed rate hikes; weak demand in the five-year Treasury auction; and oil prices returning to triple digits due to Middle East supply disruptions, accelerating inflation expectations. The two-year yield also rose to about 4.91%, with the market's implied probability of another rate hike in October rising to nearly 70%.

After a cooling in oil price gains, the bond market temporarily stabilized. Brent crude fell about 0.7% after a more than 7% rebound over two days, reducing the immediate momentum for inflation trades, and the 10-year yield retraced some of its intraday gains. The two-year yield also declined slightly. The yield on Japan's 10-year government bonds remains near its highest level since 1996, while benchmark rates in Germany, the UK, and other European countries are also at high levels in this cycle, with global bond index yields reaching levels near those of 2007.

Long-term borrowing costs remain at historically high levels. Even with a 3 basis point decline, the 10-year yield is still significantly higher than about 4.16% a year ago, having risen about 50 basis points this month. The 30-year fixed mortgage rate has risen to near its cycle high, locking in higher financing costs for housing and corporate long-term financing. The fiscal side still needs to pay higher coupons for the refinancing of maturing debt amid expansion.

Mechanically, this is a repricing of rates driven by inflation expectations and supply shocks: sellers include funds reducing duration under strong data and oil price impulses, overseas reserve management institutions, and leveraged accounts; buyers are insurance, pensions, and some high allocation trades after yields hit psychological levels. Funds are flowing from long-duration Treasuries to cash, short-term debt, and some inflation-hedged assets. The decline in oil prices leads to position covering rather than a trend reversal. Beneficiaries are floating-rate assets and institutions that can pass on financing costs; those under pressure are fiscal, real estate, and high-valuation growth stocks that rely on low-rate rollovers.

Additionally, the 10-year yield's intraday high was close to 5.20% to 5.23%, closing down to 5.17%; the two-year and five-year yields also slightly retraced from their highs, with the curve overall remaining steeper than in previous weeks, indicating that the market is pricing in a higher neutral rate and a longer duration of restrictive policy, rather than a one-time impulse.

Source: Public Information