Whenever yields spiked, someone always stepped in to scoop up bonds, calling them “cheap.” That was the case in March, May, and July of this year.
However, while US Treasury yields climbed to 5.16% for the 10-year note—the highest level since 2007—that helping hand never appeared. What is frightening about this current surge isn’t the 5% figure itself, but the fact that the buyers have disappeared.
Following local reports from New York on September 25, which gathered insights from market participants, the causes can be boiled down to three main factors: fear of inflation originating from the Middle East, the Fed’s hawkish pivot, and the collapse of bond-buying sentiment. Since the first two have been widely covered in the news, this article will focus primarily on the third.
How much did US Treasury yields rise in September?
As of September 25, US Treasury yields surged across all maturities, with shorter maturities seeing the sharpest increases.
US Treasury Yield Levels by Maturity and Increases vs. End of August (As of September 25)
| Maturity | Yield | Change vs. End of Aug |
|---|---|---|
| 2-year | 4.85% | +51bp |
| 5-year | 4.99% | +49bp |
| 10-year | 5.16% | +41bp |
| 30-year | 5.49% | +25bp |
the fact that the 2-year note rose the most indicates that the market is recalculating the Fed’s benchmark rate path. The 2-year note is the most sensitive maturity to expectations for the federal funds rate.
The speed was also a problem. Between the 23rd and 24th alone, the 10-year yield rose 24bp and the 5-year by 22bp. On the 24th, with the 3-year at 5.01% and the 5-year at 5.06%, all maturities except the 2-year briefly crossed the 5% mark. The bond market volatility index, a gauge of fear in the bond market, skyrocketed from 75 at the end of August to 105 on the 24th. According to a Newspim report, the 10-year yield hit an intraday high of 5.135% on the 23rd, setting a new 19-year record.
The 10-year note first crossed the 5% threshold on September 14. Financial News reported this breakout as the first time since October 2023, roughly three years ago. In 2023, it fell back below 5% in a single day, but this time, it has remained around 5% for two weeks. Meanwhile, the domestic market was closed for the Chuseok holiday, and on the 28th, when the holiday ended, Financial News reported figures near 5.17% for the 10-year and 5.5% for the 30-year.
The spark of the US Treasury yield surge: Why diesel?
The starting point for inflation fears was oil, specifically diesel.
At the end of August, the US and Iran struck each other’s military facilities, resuming armed conflict after a month of relative calm. Houthi rebels occupied Red Sea ports, and attacks by Iraqi militias damaged Saudi Arabia’s East-West pipeline. This effectively disrupted even the detours intended to avoid the Strait of Hormuz. As of September 25, WTI rose 7.8% from the end of August to $92.5 per barrel, and Brent crude rose 15.4% to $104.4.
However, what made the bond market even more nervous was diesel, not crude oil. US diesel prices exceeded $6.5 per gallon this week, hitting an all-time high. Given it was $3.8 in late February and $5.6 in late August, it has jumped over 70% in half a year.
Diesel powers trucks, trains, agricultural machinery, and heavy equipment. While gasoline prices affect my personal fuel costs, diesel prices are baked into the shipping and food costs of almost everything on supermarket shelves. This creates a fear that if diesel prices rise, inflation won’t just be limited to a few items but will spread widely and persist. What bond investors hate most is exactly this ‘persistence.’
Political variables also dashed expectations. When President Trump said at the Republican National Convention that “the war will end immediately after the midterm elections,” the market’s hope that tensions would ease before the election actually weakened. The Wall Street Journal reported that White House aides discussed a scenario where the conflict continues until the end of his term in January 2029.
Economic indicators also contributed. The August core CPI rose 0.3% month-over-month, exceeding the expected 0.2%, and core service inflation excluding housing rose by 0.5%. The core commodity inflation rate (annualized), which had fallen to -0.6% at the beginning of the year, rebounded to 0.9%.
*
*The Fed pushed up US Treasury yields; the hike wasn’t a ‘one-off’
The September FOMC raised rates unanimously, and the market read this not as a one-time measure, but as the beginning of a rate-hike cycle.
The policy statement included a new phrase about returning to the inflation target “more quickly,” while the mention of inflation being due to energy supply shocks was dropped. Dropping the supply shock excuse is close to a declaration that the Fed will no longer view inflation as a transitory phenomenon. The median dot plot pointed to one additional hike within the year, and among the 18 members, only two expected a freeze for the remainder of the year. During the press conference, it was even stated that “the current policy stance is difficult to view as restrictive.”
After the meeting, even those previously classified as doves spoke in unison. New York Fed President Williams and Fed Governor Barr also mentioned the possibility of further hikes.
Economic data gave the Fed more ammunition. August non-farm payrolls increased by 162,000, nearly triple the expected 55,000. The US S&P Global Composite PMI for September was 58.4, well above the expected 55.3, reaching its highest level since July 2021.
This trend was reflected directly in futures market numbers. The cumulative rate hike expectation through the first half of next year swelled from 59bp at the end of August to 101bp on the day of the FOMC, and 114bp on September 24. This implies a policy rate reaching approximately 4.8%.
Why dip-buying didn’t kick in even as US Treasury yields spiked
The decisive difference between this time and the three previous spikes this year is that investors have decided to wait until the rate-hike cycle ends.
In March, May, and July, investors viewed energy shocks as temporary.
If yields spiked, they would soon return to normal, making it a chance to buy cheap. This time, the premise has changed. Bond prices move inversely to yields. The moment you believe there are a few more rate hikes left, the bond you buy today becomes an asset that will be cheaper tomorrow. In that case, it is more rational to wait. Citadel highlighted this investor sentiment: they won’t buy rashly until the end of the hikes is in sight.
The problem is that everyone is making the same calculation. If everyone waits, buying demand dries up; if demand dries up, yields spike further; and if yields spike further, it seems the people who waited were right. It is a structure where waiting justifies waiting.
There is also a structural backdrop. According to Barclays, the share of US Treasuries held by private investors, which was around 50% a decade ago, has now risen to 73%. Of the $15 trillion in outstanding Treasuries added over the last 10 years, the private sector absorbed $14 trillion. The Fed and foreign central banks were customers who bought Treasuries for policy purposes without being overly concerned about price. Private investors are customers who crunch the numbers. Personally, the 73% figure is the one I stared at the longest in the report. It means the buffer that held up the market when yields rose has thinned by nearly half in 10 years.
Japan has also backed off. With the Bank of Japan’s normalization of monetary policy, the yield on 10-year Japanese government bonds after currency hedging is now about 80bp higher than that of US Treasuries. For Japanese investors, the reason to buy US Treasuries across the ocean has diminished. This is compounded by the Government Pension Investment Fund (GPIF) reducing its share of overseas investments to curb yen depreciation.
Treasury auction results reveal a demand gap
The results of this week’s US Treasury auctions showed the buying void in numbers.
For the 2-year ($69 billion), 5-year ($70 billion), and 7-year ($44 billion) auctions, the awarded yields were all higher than the market yields immediately before the auction. The differences were 0.2bp, 3.1bp, and 0.7bp, respectively. When the awarded yield exceeds the market yield, it means there weren’t enough buyers, so the Treasury had to offer higher interest to sell the volume. Even if 3.1bp sounds small, it was the second-weakest record for a 5-year auction since June 2022, when the Fed implemented a 75bp rate hike.
The card the Treasury played didn’t work either. The Treasury increased the limit for buybacks, which are repurchases of outstanding Treasuries, to $6 billion this month. [Reports from early September](https://m.news.nate.com/view/20260910n30621) show this was a three-fold increase from the previous $2 billion. However, they actually bought back $5.19 billion of 10-20 year notes and $4.08 billion of 20-30 year notes, failing to reach the limit. The market was disappointed that the Treasury only bought the cheapest available securities even amidst the yield surge.
European stop-loss and AI bond issuance further complicate Treasury supply and demand
While the number of buyers has decreased, the number of sellers and newly issued bonds has increased.
The trigger for selling was pulled in Europe. In the Eurozone, growth was weak, so hedge funds had piled up significant bond-buying positions. However, when this week’s Eurozone composite PMI came in at 53.1, beating the expected 51.7, those calculations went wrong. Stop-loss selling poured out of European bond markets, including France, and this selling spread to US Treasuries. Goldman Sachs identified this chain of stop-losses as the primary cause for the recent global bond weakness.
On the supply side, there is AI. Goldman Sachs projected that hyperscalers’ capital expenditures will grow from $1.1 trillion in 2026 to $1.9 trillion in 2027, and bond issuance from $250 billion to $420 billion. According to an Asia Business Daily report, corporate bond issuance by big tech and AI-related companies reached $257 billion just through August of this year. As long-term corporate bonds flood the market, long-term capital from pension funds and insurance companies is split between Treasuries and corporate bonds. For Treasuries, it’s like having one more competitor. Citadel compared companies increasing investment even in an environment with 7% borrowing rates to the 1840s railroad boom and the 1999 dot-com bubble.
Where is the peak for US Treasury yields?
Most market participants believe that upward pressure on yields will continue for a while, but there is also a strong counter-argument that we are already near the top.
Those arguing for further increases rely on a rule of thumb.
According to JPMorgan, in past tightening cycles, market yields tended to start rising ahead of the first hike and only peaked 2-3 months after the hikes. If we simply apply this based on the September hike, the calculation shows that upward pressure will remain until around the end of the year. JPMorgan suggested that if the September employment report comes in strong, expectations for an additional hike in October could strengthen, and if remaining long positions in the Treasury market are liquidated, there is a risk that yields could rise further.
On the other side is TD Securities. The fair value of the 10-year note calculated by TD’s own model is 4.25-5.25%. They evaluate that since current yields are at the upper end of that range, price attractiveness has emerged. They also left open the possibility that if energy supplies from the Middle East recover, Treasury yields could fall significantly. HSBC noted that high real interest rates are starting to become a burden on consumption and investment, suggesting caution against betting heavily on the direction of yields.
What divides these two views is ultimately the question from the beginning of this article (that there is no one to buy Treasuries).
Citi assessed that unless the supply-demand structure, which lacks a clear buyer, changes, a meaningful decline in yields will be difficult.
From Korea’s perspective, there are also voices drawing a line. Ahn Jae-kyun, a researcher at Korea Investment & Securities, said in a Financial News interview after the holiday that concerns about the Fed’s October hike do not necessarily need to lead directly to the possibility of consecutive rate hikes by the Bank of Korea.
I plan to look at that small bp figure next to the awarded yield once next month’s US Treasury auction results come out. That is where it will be revealed first whether the buyers have returned.