Inflation, deficits, and AI debt issuance are all piling on pressure, with more than half of market participants betting the 30-year U.S. Treasury yield will hit 6% by year-end.

Title context: Inflation, deficits, and AI debt issuance are all piling on pressure, with more than half of market participants betting the 30-year U.S. Treasury yield will hit 6% by year-end. Text: The U.S. 10-year Treasury yield has broken through the 5% mark, upward pressure on long-term rates has yet to subside, and changes in the buyer base for U.S. Treasuries are making the market more prone to sharp swings. Inflation remains above target, the U.S. economy remains resilient, the Federal Reserve has shifted back toward rate hikes, and U.S. fiscal financing needs continue to expand, all of which are pushing long-term Treasury yields higher. At the same time, price-insensitive foreign official investors are gradually pulling back, while price-sensitive investors such as hedge funds are taking on more U.S. Treasuries, meaning the market may become more sensitive to shifts in capital flows. On Wednesday, the U.S. 10-year Treasury yield rose 14 basis points in a single day and briefly broke above 5.1% intraday, hitting a new high since 2007; the 5-year Treasury yield also broke above 5%, likewise reaching its highest level since 2007. Japan's 10-year government bond yield rose on Thursday to its highest level since 1996, with global bond markets coming under synchronized pressure. Inflation Has Not Receded, the Economy Remains Resilient This round of yield increases is first supported by fundamentals. The U.S. July PCE price index rose 3.7% year over year, still clearly above the Federal Reserve's 2% target. Rising oil prices have added uncertainty to the disinflation path, and if energy prices remain elevated, they could further lengthen the time needed for inflation to cool. At the same time, the U.S. economy has not clearly lost momentum. The job market remains stable, consumption is still supported, and the investment boom driven by AI data center construction is also boosting corporate capital expenditure. Economic resilience means the Federal Reserve has no urgent reason to shift quickly toward easing. The Fed recently raised its policy rate by 25 basis points to 3.75% to 4%. Federal Reserve Governor Michael Barr said that with inflation still above target and economic growth strong, further policy adjustments may still be necessary; Chicago Fed President Austan Goolsbee said the process of returning inflation to 2% will not be smooth. Therefore, long-end yields are facing the triple pressure of inflation, growth, and monetary policy, not just a short-term oil price shock. U.S. Treasury Buyers Are Becoming More "Fragile," Raising the Risk of Market Volatility The supply side is also putting pressure on the U.S. Treasury market. The U.S. fiscal deficit is large, and continued financing means the market needs to absorb a large amount of newly issued government debt; at the same time, large technology companies are increasing debt financing for AI infrastructure investment, further raising demand for long-term funds. More noteworthy is that the buyer structure is changing. Research by the New York Fed shows that participation by price-insensitive foreign official investors has declined, while the role of hedge funds and private investors has increased. Compared with the former, market-based investors such as hedge funds pay more attention to yields, prices, and financing conditions. When yields are high enough, such funds can absorb newly issued Treasuries; but if the market adjusts quickly, their positions may also change accordingly, making bond demand more elastic. This means that with new supply continuing to increase and stable buyers decreasing, the U.S. Treasury market may need to attract funds through higher yields. Once yields rise rapidly, falling bond prices may also trigger passive position reductions such as stop-losses and margin pressure, further amplifying market volatility. Therefore, what is worth watching now is not whether hedge funds will withdraw, but that as the U.S. Treasury market becomes more dependent on price-sensitive funds, the impact of supply and demand changes on yields may be further amplified. After 5%, What Else Will the Market Watch? A 5% 10-year U.S. Treasury yield is not a historical high, but it is already enough to make the market reassess the long-term neutral rate. A previous Bloomberg survey of market participants showed that more than half of respondents expect the 30-year U.S. Treasury yield could reach 6% before year-end. This does not mean 6% will necessarily be reached, but it reflects growing market concern that long-term rates will continue to rise. At the same time, a 5% yield also increases the appeal of U.S. Treasuries to long-term funds. Compared with the low-rate environment after the financial crisis, U.S. Treasuries can now offer higher nominal returns, and some funds may therefore reallocate toward fixed-income assets. Therefore, the key going forward is not only inflation and the Federal Reserve, but also the scale of U.S. fiscal financing and whether the market can continue to absorb newly issued Treasuries. If stable buyers continue to decline while the share of price-sensitive funds rises further, U.S. Treasury yields may react more sharply to market shocks. This article is reprinted from "Wallstreetcn", GMTEight editor: Feng Qiuyi.