Kevin Dietsch

The US 30-year Treasury yield briefly rose above 5.40% during trading on Tuesday (September 15), its highest level since June 2007 — nearly a 19-year high. The 10-year Treasury yield also broke above 5.02% on the same day, setting a similar record since 2007.

Across the world, Japan’s 10-year government bond yield rose to about 3.03%, its highest level since 1996. The UK’s 10-year gilt yield climbed above 5.40%, also reaching a level not seen since 2007, while France’s 10-year yield topped 4.5%, its highest since 2008. Germany’s 10-year yield likewise rose to its highest level since 2009. This is not just a US Treasury story: long-term government bonds across several major economies were sold off almost simultaneously.

Once risk-free yields remain firmly above 5%, every asset valued using a discount rate — from public funds and equities to mortgage interest payments — begins to undergo a quiet repricing.

1. Safe-haven assets become the assets investors seek to avoid

For years, bonds have stood for safety, stability and low volatility. But that conventional wisdom has been challenged over the past month.

Treasury yields move inversely to prices. The 30-year yield rising to 5.40% means investors are demanding a very high premium before they are willing to hold US government debt. Nor is this bout of anxiety confined to the US. Japanese government bonds have long been regarded as one of the world’s last safe havens, with the Bank of Japan keeping yields in check through its yield-curve control policy. This time, concerns about the sustainability of Japan’s public finances have outweighed the central bank’s ability to support the market, and the 10-year Japanese government bond yield broke decisively through its long-standing control level. The simultaneous rise in long-term yields in Britain, France and Germany shows that the selling pressure is broader than simple US-Japan spillover: global long-end interest rates are undergoing a systemic stress test.

2. What is adding to the pressure? Three forces converge

First, inflation fears fuelled by tensions in the Middle East. Rising geopolitical tensions sent Brent crude briefly up to US$107.30 a barrel. Oil is the cost foundation of the global economy. Once prices move back above US$100, markets immediately worry that persistent inflation could return. Investors holding fixed-income bonds would then face a real loss of purchasing power, prompting faster selling of long-term debt.

Second, a wave of bond issuance by technology giants. To fund huge capital spending on artificial intelligence chips and data centre construction, technology giants including Microsoft, Meta (Meta Platforms), Oracle, Alphabet and Amazon are issuing investment-grade bonds on a large scale in the primary market. Their financing needs are directly competing with US Treasuries for the same pool of long-term investors, pushing up borrowing costs across the market. At the same time, investment banks have reduced their inventories because of regulatory capital constraints, weakening the intermediaries that normally absorb large volumes of bonds.

Third, the US government’s fiscal black hole. The federal deficit continues to expand. Net interest payments by the US Treasury have exceeded US$1 trillion for the first time in history so far this fiscal year, while total federal debt is approaching US$40 trillion. During the quantitative easing era, the Federal Reserve was once the biggest buyer supporting the market. Now, as its balance sheet contracts, that former super-buyer has retreated, leaving private-sector capital to bear the burden. It is worth noting that the market remains divided over whether a structural decline in foreign official buyers amounts to an outright sell-off of Treasuries. Some analysts argue that it reflects a structural change in how foreign central banks manage their reserves, rather than a genuine loss of confidence. See the fact check below for more.

3. What does a 5% risk-free rate mean for your wallet?

Your funds and wealth-management products: If you hold a conservative “fixed income plus” fund or a short-duration bond fund, its net asset value is likely to see a modest pullback in the short term. As yields rise across the market, the prices of existing bonds fall. This is duration risk, not necessarily a sign of poor fund management.

Mortgages and corporate financing: For Hong Kong readers, this point is more direct than it is for readers on the mainland. The Hong Kong dollar’s linked exchange-rate system means the Federal Reserve’s interest-rate decisions have long served as the basis for corresponding adjustments to the Hong Kong Monetary Authority’s base rate. That in turn affects HIBOR and prime rates, directly influencing monthly repayments for borrowers on H-plan and P-plan mortgages. In mainland China, mortgage rates are not determined directly by Treasury yields. However, higher overseas bond-issuance costs can still feed through the external discount rate applied to renminbi assets, affecting the financing environment for mainland businesses, raising corporate borrowing costs and weighing on earnings expectations for listed companies.

Personal savings strategies: When risk-free yields genuinely approach 5%, savers’ appetite for higher returns will be rekindled. Jesse Marre, a senior portfolio manager at Hilbert Group, said: “Once it breaks above 5%, risk assets start to become concerning.” A large amount of money that would otherwise flow into higher-risk equities could return to government bonds or large-denomination certificates of deposit, intensifying competition among bank deposits and wealth-management products.

4. This week’s flashpoint: not just the Federal Reserve

There are in fact two key events for markets this week, not one. The Federal Open Market Committee is meeting on September 15 and 16. Market pricing based on federal funds futures puts the probability of a 25-basis-point rate hike at about 85% to 88%. If implemented, the target range for the federal funds rate would rise from the current 3.50% to 3.75% to 3.75% to 4.00%. In other words, expectations of a rate hike this week are not evenly split between a hold and an increase; markets increasingly see a hike as the more likely outcome.

The Bank of Japan is also holding its policy meeting on September 17 and 18. Markets broadly expect the central bank to raise rates at the same time, taking its benchmark rate to its highest level since 1995. In other words, the policy windows of the world’s two major central banks overlap this week. Any policy signal from either one that diverges from expectations could trigger another bout of volatility, which is why Japanese government bonds deserve particular attention.

Phoebe White, head of US rates strategy at UBS, previously said that the real economy had yet to show clear signs of weakness, making it difficult to suppress inflation through rate hikes alone. Markets are also closely watching whether structural demand for Treasuries from foreign official investors has weakened. This will affect whether the Federal Reserve can once again expand its balance sheet to support markets in the future.

5. Conclusion: finding certainty amid uncertainty

The US 30-year Treasury yield touching 5.40%, together with multi-year highs in long-term bonds in Britain, Japan, France and Germany, is not merely a Wall Street headline. It marks a shift in the global macro-financial cycle. The growth narrative fuelled by cheap money is nearing its end, to be replaced by a new cycle demanding much more from cash flow, cost control and hedging capabilities.

For ordinary investors, the priority at this stage should not be panic selling, but reviewing their exposure to long-duration assets. Before interest rates genuinely peak and begin to fall, maintaining flexibility in cash flow and focusing on companies with strong free cash flow rather than those relying mainly on financing based on a concept may be a more prudent way to weather the storm.