By Ankur Banerjee and Amanda Cooper
SINGAPORE/LONDON, Sept 11 (Reuters) - The global bond selloff pushed U.S. 10-year Treasury yields near the closely watched 5% level on Friday as inflationary fears stemming from oil prices surging well beyond $100 a barrel and rising chances of a near-term U.S. rate hike rattled investors.
With borrowing costs from Tokyo and Sydney to New York and London at multi-decade highs, investors are pricing in the need for interest rate increases to tackle price pressures
due to the more than six-month long war in the Middle East.
Benchmark 10-year yields for the G7 economies have risen by an average of nearly 19 basis points this week, in their worst weekly selloff since the start of the war.
Two-year yields, which are more sensitive to shifts in expectations for inflation and interest rates, have risen by an average of 22 bps, with those in big energy importers like Italy and Britain increasing the most.
"Once again, it is geopolitical fears driving everything," Deutsche Bank strategist Jim Reid said.
The European Central Bank raised rates on Thursday and warned price pressures could prove lasting, while data showing U.S. producer prices increased in August stoked wagers of an imminent rate hike when the Federal Reserve meets next week.
Ballooning government borrowing across developed markets has also become a persistent source of concern, with investors demanding greater compensation to hold sovereign debt.
Sovereign yields serve as a reference point for asset prices across financial markets, and this higher price of money means steeper mortgage rates for consumers and tougher spending choices for governments as debt costs climb.
"We're seeing a perfect storm of higher oil prices, more inflation fears, central bank hawkishness and ongoing concerns over fiscal deficits all combining to push global yields higher," said Mansoor Mohi-uddin, chief macro strategist at Bank of Singapore.
"If tonight’s consumer price data is strong then 10-year Treasury yields will likely break 5.00%," he said, referring to eagerly anticipated U.S. CPI data later on Friday.
A sustained break for 10-year Treasuries above 5% is seen by some analysts as a critical line that could make bonds more competitive with stocks, potentially pulling dollars out of equity markets.
Higher Treasury yields also flow through to the broader economy through costlier mortgages, auto and consumer loans, and more expensive corporate and municipal borrowing.
Aside from a couple of brief forays above 5% in late 2023 and in 2006 and 2007, the 10-year yield has not spent any meaningful time above that threshold since 2002.
10-YEAR YIELD JUST SHY OF 5%
Yields on 10-year Treasury notes rose as high as 4.979% in early Asia trading, the most since late 2023, keeping the mood nervous in other regional markets. Australia's 3-year government bond yield surged 18 basis points to a 15-year high of 5.047%.
Japan's 10-year government bond yields rose 6 bps to 2.97%, with the Bank of Japan widely expected to raise rates to a 31-year high next week and possibly signal faster tightening in the future.
In Europe, 10-year German Bunds were up 1 bp on the day at 3.503%, having hit their highest since 2011 earlier in the week, while French 10-year yields, the poorest-performing major economy bonds this week, were steady around 16-year highs at 4.429%.
Domestic politics have dogged French bonds this month, where the country's budget deficit risks topping 5% this year, which has pushed the premium the French government must pay to borrow for 10 years versus the German government to the most since 2012.
Prashant Newnaha, senior rates strategist at TD Securities, said 10-year yields above 5% are inevitable the longer oil sustains above $100, noting the August inflation data is "setting up as the most important print for the Fed and markets so far this year."
SURGING OIL PRICES DOG POLICYMAKERS
Brent crude futures surged to a four-month high of $109.97 a barrel, set for about a 13% weekly jump, as increasing attacks along key shipping routes in the Middle East fuel fears of a prolonged disruption to supplies.
The sharp rise in oil prices and simmering price pressures have shifted investor expectations from the U.S. central bank. Traders are pricing in a 72% chance of a Fed hike next week, up from 49% a week earlier, the CME FedWatch tool showed.
The 2-year note yield, which typically moves in step with interest rate expectations for the Fed, hit its highest level since July 2024 at 4.596% on Friday after jumping 12 bps in the previous session. It was last at 4.558%.
The bond selloff also deepened after the U.S. government said it bought back $5.2 billion worth of bonds in its latest buyback operation meant to support market liquidity, less than the $6 billion cap and only half of the $10.5 billion in bonds offered in the operation.
(Reporting by Ankur Banerjee in Singapore, additional reporting by Gregor Stuart Hunter in Singapore, Jiaxing Li in Hong Kong; Editing by Kim Coghill)
