10-year US Treasury yield breaks above 5%! "Prophet" warns: The sell-off isn’t over yet

U.S. Treasuries faced another round of intense sell-off, with the 10-year yield breaking above the 5% mark on Monday, reaching a new high since 2023. A combination of inflation concerns and supply pressures is resonating, putting global bond markets under pressure.

The 10-year yield reached as high as 5.01% on Monday. The last time it surpassed 5% was in October 2023, but it only lasted for a day before pulling back.

This time, the U.S. dollar strengthened simultaneously. The Bloomberg Dollar Spot Index rose as much as 0.6% in one day, potentially marking its best single-day performance since June 17. All G10 currencies fell across the board.

The continued climb in yields poses double pressure on both the stock market and the economy. As the benchmark interest rate for global government and corporate debt, a rising 10-year Treasury yield will increase borrowing costs, suppress valuations of overvalued equity assets, and drag on economic growth.

The market has now priced in a potential Federal Reserve rate hike as soon as September 16. U.S. Treasuries may record their first annual loss since 2022 this year.

Steven Barrow, Standard Bank G10 Head of Strategy, who was the first to forecast 5% in February this year, said the sell-off is far from over. He raised his year-end forecast for the 10-year yield to 5.2% and expects it to climb further to 5.3% in Q1 2027.

When Barrow made his 5% call back in February, the market generally expected the Fed to cut rates successively and the 10-year yield was below 4%, making his view very contrarian. Now, the situation in Iran, energy price shocks, and inflation data have successively confirmed his prediction, further reinforcing his bearish stance.

He emphasized that the long-term structural forces driving rates higher — including persistent strain on global supply chains, ongoing impact of climate change, and tighter immigration policies restricting labor supply — are becoming stronger than ever. Barrow stated:

"My structural view is that we're in a regime of 'higher rates for longer.'"

He anticipates that the Federal Reserve will raise rates once each in September and December, and then keep short-term rates unchanged until the end of 2027.

The immediate trigger for this sell-off comes from multiple fronts. Following U.S. military action against Iran, energy supplies in the Middle East have been hit, sending oil prices sharply higher. WTI crude remained above $100 per barrel on Monday, and inflation expectations heated up as a result.

Meanwhile, the August Consumer Price Index data was above expectations, further cementing market bets on Fed rate hikes.

With less than two months to go before the U.S. midterm elections, the 10-year yield has already risen over one percentage point from before the outbreak of war with Iran. Treasury Secretary Benson previously resorted to unconventional measures such as increasing long-term bond buybacks in an attempt to suppress long-end rates, but with limited effect. The selling pressure has not eased.

This round of U.S. Treasury sell-off is not an isolated phenomenon, but rather reflects deeper structural pressures. The indicator measuring global government borrowing costs has climbed to its highest level since 2007, as investors demand higher compensation for holding longer-term debt and competition for capital between governments and companies intensifies.

The U.S. fiscal deficit continues to expand, with the size of the Treasury market ballooning from about $4.5 trillion in 2007 to around $32 trillion now, and the federal debt-to-GDP ratio exceeding 100%.

Fitch Ratings has issued a warning, believing that the U.S. is losing its ability to withstand future economic shocks. The boom in artificial intelligence infrastructure construction is bringing a large influx of new supply to the bond market while continuously injecting stimulus into the economy, further increasing pressure on the bond market.

CreditSights’ Head of Investment Grade and Macro Strategy, Zach Griffiths, stated, "There are a lot of deep-seated factors that make continued upward pressure on rates the path of least resistance right now." He believes the 10-year yield could go further up to 5.5%.

Rising U.S. Treasury yields have boosted the dollar, but some strategists remain cautious about the sustainability of its rally.

Meera Chandan, Co-Head of Global FX Strategy at JPMorgan, pointed out that the dollar has underperformed its fundamentals in recent weeks. "Elevated energy prices, strong August inflation and employment data, as well as Fed Chairman Walsh’s hawkish remarks at Jackson Hole, should have driven the dollar higher, but the actual performance has lagged."

She maintains a bullish stance on the dollar, especially against low-yielding currencies such as the Swedish krona and the Canadian dollar.

Elias Haddad, Global Market Strategy Head at Brown Brothers Harriman & Co., warned that the dollar faces asymmetric risks — upside potential is limited in a hawkish scenario since the market has already priced in about 100 basis points of rate hikes over the next 12 months; any dovish surprise would bring more significant downside risk.

In the options market, the one-month risk reversal indicator for the dollar index has turned positive for the first time since September 2, indicating that traders are positioning for further dollar strength.