Global bond selloff pushes US 10-year yield toward 5% as oil surges past USD 100

A global bond selloff pushed the U.S. 10-year Treasury yield toward the closely watched 5% level Friday as a surge in oil prices above USD 100 a barrel intensified inflation fears and raised expectations for further interest rate increases.

Borrowing costs from Tokyo and Sydney to New York and London have climbed to multi-decade highs as investors increasingly price in tighter monetary policy to contain renewed price pressures linked to the more than six-month-old war in the Middle East.

The selloff reflects growing concern that higher energy prices could keep inflation elevated for longer, forcing central banks to maintain or raise interest rates even as economic growth faces pressure from higher borrowing costs.

Central banks face renewed inflation pressure

The European Central Bank raised interest rates Thursday and warned that price pressures could prove persistent, adding to concerns among investors that monetary policy may need to remain restrictive.

In the United States, data showing producer prices rose in August further strengthened expectations of an imminent Federal Reserve rate increase. Investors are now closely watching the Fed's policy meeting next week for signals on the path of interest rates.

Higher oil prices are emerging as a key source of inflation risk. Crude prices above USD 100 a barrel could feed through to transportation, manufacturing and consumer prices, complicating efforts by central banks to bring inflation back toward their targets.

Government borrowing adds to bond market pressure

Rising government borrowing across developed economies has added another layer of pressure to sovereign bond markets.

Investors are demanding higher returns to hold government debt as concerns grow over expanding fiscal deficits and the increasing supply of bonds. The combination of elevated inflation expectations, tighter monetary policy and heavy government borrowing has pushed bond yields higher.

The rise in yields has increased borrowing costs for governments while also putting pressure on equity and other risk assets, as higher returns on relatively safe government debt make riskier investments less attractive.

Japan signals possible rate hike

Japan is also preparing for a possible increase in borrowing costs. The Bank of Japan plans to raise its key interest rate to 1.25% from the current 1% at its policy board meeting on September 17-18, Nikkei reported.

The potential increase is aimed at containing inflationary pressure amid rising crude oil prices and the depreciation of the yen.

If implemented, the move would mark the shortest interval between rate increases in the Bank of Japan's current tightening cycle, which began in March 2024. The central bank last raised its policy rate in June.

The prospect of simultaneous monetary tightening across major economies has added to pressure on global bond markets, with investors reassessing the outlook for inflation, interest rates and government borrowing costs.