Will the 30-year yield break 6% this month? Economic resilience and inflation pressures drive rates higher, further intensifying the sell-off in US Treasury bonds

According to reports from Zhihu Finance APP, U.S. Treasury bonds faced another sell-off on Monday, with long-term Treasury yields rising to their highest levels in decades. Amid sustained U.S. economic expansion, booming AI infrastructure investment, and persistent inflationary pressures, investors are becoming increasingly cautious about whether Treasury yields have peaked.

On Monday, U.S. 10-year and 30-year Treasury yields each rose at least 7 basis points, reaching 5.34% and 5.7% respectively, both hitting their highest levels since 2002; short-term Treasury yields increased by about 2 to 4 basis points. Since mid-August, Treasury yields have been climbing steadily. On one hand, the market needs to digest strong economic growth and the capital demand driven by AI investment; on the other hand, persistent inflation makes it hard to rule out further rate hikes from the Federal Reserve.

Earl Davis, Head of Fixed Income at BMO Asset Management, said on Monday that it is "inevitable" for the U.S. 30-year Treasury yield to break above 6%, and it is likely to happen this month. If this prediction comes true, the 30-year Treasury yield will reach a level not seen since 2000. Davis believes that the current volatility in the bond market is forming a cycle that drives rates even higher, keeping long-term yields under upward pressure.

Meanwhile, U.S. services sector data released on Monday further reinforced caution in the bond market. The ISM Services PMI for September showed that the U.S. services sector slowed its expansion, but price pressures increased significantly. The prices paid index rose to 74, exceeding market expectations and marking the highest level since July 2022.

Vail Hartman, a strategist at BMO Capital Markets, stated that this report overall reflects rising inflationary pressures while nominal economic growth remains strong, further reinforcing the core factors that have kept the bond market under pressure in recent weeks.

As U.S. Treasury yields continue to climb, the market is finding it increasingly difficult to determine where long-term rates might peak. The U.S. economy remains in expansion, and the AI infrastructure boom is boosting corporate capital expenditures. Meanwhile, pricing pressures in the services sector are warming up again, suggesting that the path of disinflation may remain complicated. Together, these factors support the market’s expectation that interest rates will stay elevated for a longer period.

Interest rate swap markets show that traders currently see about a 25% chance of a Federal Reserve rate hike at its October meeting, while a 25-basis-point hike by December is now almost fully priced in.

Therefore, even though bets on immediate action by the Fed in October remain low, investors continue to anticipate the possibility of further tightening monetary policy in the coming months. For long-term Treasuries, strong growth, sticky inflation, and the potential for rate hikes all add pressure.

A series of upcoming U.S. Treasury auctions this week will also serve as an important window for gauging investors' appetite for current high-yield levels. The cycle of coupon-bearing Treasury auctions kicks off Tuesday with a $58 billion sale of 3-year notes. The subsequent 10-year and 30-year auctions are drawing more focus, as demand amid multi-year highs in long-end yields will directly test investors’ willingness to increase holdings of long-term U.S. Treasuries at current price levels.

If long-term bond auction demand is weak, it could further intensify concerns about the long-term supply-demand dynamics of U.S. Treasuries. Conversely, if high yields attract strong buying, it may provide some support to the bond market, which has been under sustained pressure recently.