Don't rush to catch a falling knife! Inflation cannot contain the US bond market's plunge, and it is likely not over yet.

Recent significant selling pressure on US Treasury bonds is likely far from over. Analysts indicate that high inflation, market interest rate expectations changing, combined with a shift in investor trading behavior, will continue to suppress bond prices. In the coming weeks, bond yields may continue to rise further. For months, many investors have viewed a 4.5% yield on the benchmark 10-year Treasury bond as an attractive buying point. However, when the yield broke through this level, market participants adjusted their expectations and began to reconsider the next entry point for buyers. Padhraic Garvey, Managing Director of Global Rates and Debt Strategy at NatWest Markets, stated, "The key question now is whether investors will still enter the market at current levels. In my view, this selling spree is likely to continue spreading." He also mentioned that multiple underlying factors are still driving selling behavior, and the yield on the 10-year US Treasury bond is likely to rise to 4.75%. The continuous increase in benchmark bond yields also affects the US stock market, as higher borrowing costs continue to add pressure on corporate operations and consumer spending. Inflation remains the key driver of market sentiment. Recent data on consumer prices and industrial production have exceeded market expectations, confirming that prices are not falling as quickly as previously anticipated. With more inflation data set to be released in May, industry experts generally expect inflation levels to remain high. Once bond market investors perceive that inflation will remain high or even increase further, they will demand higher bond yields to offset losses from shrinking purchasing power. As of last Friday, the breakeven inflation rate on the 10-year US Treasury bond, reflecting market expectations for long-term inflation, rose to 2.507%, approaching a three-year high. This data to some extent reflects investors' confidence in the Federal Reserves ability to control inflation in the long term. Garvey warned that even a slight increase in inflation expectations to the range of 2.6% to 2.7% would drive bond yields significantly higher, potentially pushing yields up by another 10 to 30 basis points. These signs indicate that the market has not yet fully absorbed the potential risks of sustained high inflation. Investors are now beginning to assess two possibilities: that the Federal Reserve may extend the duration of high interest rates, and that if inflation fails to decline, there may even be a possibility of restarting rate hikes. As investors gradually abandon expectations of rate cuts, short-term yields have already risen. Jim Barnes, Managing Director of Fixed Income at Bryn Mawr Trust, stated that overall market sentiment has clearly shifted, and the current interest rate environment is completely different. Overlaying the lack of positive news on the Iran situation with continued evidence of inflation pressure in various economic data, the bond market has completely changed its pricing logic and pushed asset prices higher across the board. Long-term bond market faces challenges, overseas bond purchase dynamics change The situation at the long end of the US bond yield curve is also filled with uncertainty. Guneet Dhingra, Managing Director of US Rate Strategy at BNP Paribas, stated that after the 30-year US Treasury bond yield broke through the 5% level, it has completely lost clear resistance levels to the upside. In the past, yields would stop at specific levels, but once a key level was broken, the upside potential would be completely open. He admitted, "Now the market has lost its pricing anchor, and in an environment of high inflation, expanding fiscal deficits, and generally rising bond yields globally, there is no force that can hold back the US bond yields from rising further." In addition, the changing structure of US bond buyers is also a key factor affecting the market. Previously, a group of countries with trade surpluses with the US were stable long-term buyers of US bonds, with low sensitivity to short-term market fluctuations. Dhingra stated that the main buyers of US bonds have now changed, and are more sensitive to price fluctuations, with funds more concentrated in international financial centers such as the UK, Belgium, the Cayman Islands, and Luxembourg. These regions are core custodians for hedge funds holding US bonds and are among the top seven holders of US bonds overseas. As early as March last year, the UK surpassed China to become the second largest foreign holder of US bonds, with holdings now close to $900 billion. Dhingra said that this shift means that higher yields no longer automatically attract buyers as before. Investors have become more cautious and selective, which could lead to further increases in yields before demand picks upbefore finding the true bottom, they may have to test higher levels. Garvey from ING summed up, "The market adjustment is far from over, it's only May now, and upcoming inflation data will continue to rise, with continued severe pressure on the bond market."