The US 10-year Treasury yield climbed to 5.34% on Thursday, reaching its highest level since 2002 as investors weighed persistent inflation, higher oil prices, government borrowing and strong demand for capital from the artificial intelligence sector. The yield had earlier risen to 5.33%, surpassing its 2007 peak, according to reports cited in the material.
Inflation remains a key concern for investors as expectations that price pressures could stay above the Federal Reserve's target have kept interest-rate expectations elevated. Market pricing has pointed to the possibility of another Federal Reserve rate increase by the end of 2026, with overnight-indexed swaps fully pricing in a hike by year-end at the time of the report. The US economy has continued to show resilience despite elevated borrowing costs.
Higher oil prices are adding to the inflation concerns, particularly amid disruptions linked to the war in the Middle East. Rising energy costs can feed into broader prices and make it more difficult for central banks to bring inflation under control. HSBC chief Asia economist Fred Neumann also pointed to large government deficits, which require substantial borrowing and increase demand for funds, putting additional pressure on borrowing costs.
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The rapid expansion of artificial intelligence investment is another factor affecting demand for capital. Technology companies are committing large amounts of funding to computing infrastructure and facilities needed for AI development, adding to borrowing demand globally. Neumann said even a softer-than-expected US inflation reading may not be enough to calm bond markets because investors are also focused on government deficits and increasing funding requirements from the AI sector.
The rise in yields has also been driven by a prolonged sell-off in government bonds. Investors have been selling bonds for several months, pushing prices lower and yields higher, while strong US economic data and movements in oil prices have added to the pressure, according to Wren Sterling chief market strategist Rory McPherson. The 30-year US Treasury yield has also reached its highest level since 2002, while government borrowing costs in France, Britain and Japan have risen to multi-decade highs.
The outlook for Treasury yields will depend on inflation, government spending, central-bank policy and demand for long-term debt. Analysts cited in the material said higher yields could become a more persistent feature of financial markets as investors reassess where long-term interest rates should settle. Rising Treasury yields could also put pressure on stocks, credit markets and other financial assets, while investors continue to assess whether the recent bond sell-off has created opportunities in longer-term government debt.
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