Oil prices and AI spending together have sparked concerns about inflation. The yield on the 30-year US Treasury bond has risen above 5% again.

Earlier this week, the yield on the 30-year US Treasury bond broke through 5% for the first time since July last year, marking an important threshold. Traders are closely watching for signs of further increase. As of the time of writing, the yield stood at 5.01%, after reaching 5.03% last Monday. The core of this sell-off is the market's concerns about inflation and the potential reduction in rate cuts, as the Strait of Hormuz remains closed and oil prices surge. In addition, the massive spending by companies in the field of artificial intelligence has raised concerns about the possibility of accelerated price increases in the short term. Reaching or exceeding 5% is crucial because it heightens concerns about the US government's budget and growing debt servicing costs. It will also have significant effects on other financial markets and the real economy, potentially leading to higher mortgage rates and harming consumer interests. Vivek Paul, Global Investment Portfolio Research Director and Chief Investment Strategist for the UK at BlackRock, said in an interview, "We are seeing bond prices being repriced as the market expects rates to remain high for longer, or that there will not be as many rate cuts. I think this is reasonable. Economic data before the outbreak of the war on February 28th indicated that global inflation was not slowing down as quickly as expected, and the US economy still remains relatively healthy. Various signs indicate that inflation levels will be higher than what the market traditionally expects." Underweighting long-term bonds BlackRock's Investment Research Institute reduced its long positions in US Treasury bonds, believing that energy shocks and existing unfavorable factors will push up term premiums. Term premium refers to the additional yield required by investors to hold long-term bonds instead of rolling over a series of short-term bonds during the same period. The unclear outlook for inflation has made rate cut expectations uncertain. Previously, with Kevin Wash taking over as the Chairman of the Federal Reserve, the market widely expected the Fed to cut rates in 2026. However, the market has shifted towards expecting the Fed to further tighten monetary policy, with swap trades indicating a 50% chance of a 25-basis point rate hike in early 2027. The Fed last week maintained its target rate in the range of 3.5% to 3.75%. However, three officials had differing opinions on this policy statement, suggesting that it may no longer be appropriate to signal the Fed's next move as a rate cut. Henrietta Pacquement, Senior Fixed Income Portfolio Manager at Allspring, said that yields are reaching levels of interest to investors, but she prefers US mid-term government bonds. Pacquement said, "Long-term bonds have always been an area where we are more cautious because we expect greater volatility in long-term bonds due to their longer maturity. If energy supplies are further disrupted, for example, if there is further damage to Middle Eastern oil infrastructure, yields could break through recent ranges. In addition, AI-driven economic growth in the US could trigger a central bank response, pushing up yields." US Treasury auction plan While closely watching the turmoil in the Middle East, bond traders are also focusing on the quarterly financing plan to be announced by the US government on Wednesday. This plan typically provides guidance on the size of auctions for notes and bonds before July. Although the announcement in February reiterated the expectation that auction sizes will remain unchanged "at least for the next few quarters," investors and strategists expect that the guidance has changed due to the need for potentially faster increases in auction sizes. Frederik Romedahl Poulsen, Chief Strategist at Velliv Pension & Life Insurance AS, said, "Timing-wise, the week of refinancing in the US, with yields breaking through the 5% mark, is interesting." He expects the announcement to "basically not cause much of a stir," but the US Treasury Department is likely to make subtle adjustments to its forward guidance before any changes in auction sizes next year.