Selling pressure on US bonds shows no signs of easing

The selling pressure on US Treasury bonds continues due to expectations that increased artificial intelligence (AI) spending will accelerate economic growth, while Middle East tensions contribute to persistent inflation risks.

Energy supply concerns are rising across various regions due to both geopolitical tensions in the Middle East and the risks of the Russia-Ukraine war, as the targeting of energy facilities intensifies inflationary pressures.

Central banks worldwide are increasingly expected to accelerate their monetary policy tightening processes amid rising oil prices.

Ongoing AI investments are expected to support potential economic growth via gains in productivity, but developments on the AI side and the fact that inflation has yet to be brought under control continue to fuel volatility in the bond markets.

The Fed raised its policy rate by 25 basis points in September to 3.75-4%, its first rate hike since 2023.

The Fed, the European Central Bank (ECB) and the Bank of Japan’s (BoJ) hawkish steps did not ease inflation concerns, raising investor demand for higher real interest rates.

The US 10-year Treasury yield hit its highest since 2007 at 5.3% on Tuesday before settling at 5.24% on Wednesday. The economy’s resilience and persistent inflationary pressures strengthened estimates that the Fed will continue to hike rates.

The two-year yield rose more than 60 basis points this March, reaching 5%. The yield tested its highest since May 2024 at 4.97% on Tuesday before settling at 4.9% on Wednesday.

Analysts warn that these surging Treasury yields serve as a benchmark for global markets, directly inflating borrowing costs across various assets, ranging from corporate debt to consumer mortgages.

Sant Manukyan, deputy general manager at IS Investment, told Anadolu that AI has been a factor accelerating real growth and altering bond market dynamics.

Manukyan stated that the Atlanta Fed is expecting strong economic growth of around 5% in the third quarter, marking a nominal expansion of roughly 7% when considering inflation.

“We’re seeing shifts in portfolios due to heavy long-term borrowing of AI companies as investors are opting to buy fewer US Treasuries and opt for the corporate bonds of these firms that are heavily indebted over the long term,” he said. “We’re also seeing that inflation expectations are not as dominant a factor in the selling pressure on the bond market as is often suggested.”

Manukyan noted that deteriorating inflation expectations played a key role to a certain extent in the rise in bond yields, but some concerns over US debt dynamics are still on the table.

He added that the yield spike reflected a broader global realignment, as global investors shifted away from traditionally safe-haven assets, reflected in the yields on 10-year French government bonds that recently began to outpace Italian bonds for the first time in an extended period.