US Treasury yields climbed across the board on Thursday, with the 10-year note breaking above 4.7% to reach its highest level since January 2025.
Multiple factors converged simultaneously to pressure the bond market. A sudden escalation in Middle East tensions pushed Brent crude oil above $100 per barrel at one point, US initial jobless claims unexpectedly plummeted, and tech giants issued large amounts of long-term bonds to finance AI infrastructure.
The 10-year Treasury yield rose 5 basis points to 4.71%, its highest level since January 15, 2025, just before the start of President Trump's second term. Meanwhile, the 30-year Treasury yield climbed over 4 basis points to 5.188%. This yield has now spent 27 trading days above 5% this year, including a streak of 12 consecutive days, the longest such period since the 2008 financial crisis.
The sharp rebound in oil prices has intensified market fears of a resurgence in inflation.
Brent crude futures briefly hit $100 per barrel, a significant rally from the lows seen after the initial US-Iran peace agreement last month, making the Federal Reserve's policy path even more uncertain. "The economy may be heating up today, but the escalation of conflict in the Middle East has caused energy prices to turn sharply higher almost overnight, leaving the outlook for the job market full of uncertainty," said Chris Rupkey, Chief Economist at FWDBONDS.
Jobless Claims Plunge, Reinforcing Signs of Economic Resilience
For the week ending July 18, US initial jobless claims fell to 187,000, significantly below the 212,000 expected by economists surveyed by Dow Jones, indicating continued resilience in the labor market.
This data further reinforced market expectations that the Federal Reserve is unlikely to cut interest rates in the near term, pushing the 2-year Treasury yield up over 4 basis points to 4.343%. Rupkey noted that half of Fed officials have now factored in the possibility of a rate hike this year. However, he added that structural risks in the job market—particularly the increasing difficulty for new graduates to find employment—remain a concern for policymakers. "Whether it's growth risks or the cost-of-living crisis from high inflation, the economy hasn't truly turned the corner," he added.
Investors' next focus will be on Friday's release of the S&P Global US Purchasing Managers' Index (PMI) flash report, which will provide further insight into the health of the manufacturing and services sectors.
Sudden Shift in Middle East, Oil Price Gains Among Top Three in a Decade
Following Houthi claims of attacks on two Saudi oil tankers in the Red Sea, coupled with US threats to escalate strikes against Iran, oil prices nearly reversed their earlier losses within a week this week.
The July Brent crude contract jumped 5% in a single day to trade above $99 per barrel, its highest since the US-Iran peace agreement was reached. US West Texas Intermediate (WTI) crude futures rose about 4%, breaking above $90 per barrel. Brent's gain this month is on track to rank among the top three single-month increases of the past decade.
This rapid surge in oil prices directly lifted inflation expectations, transmitting pressure to global bond markets.
In Europe, the UK 10-year gilt yield rose 4 basis points to break above 5%. Newly appointed Prime Minister Andy Burnham announced a 20% cut in business rates for the hospitality sector, estimated to cost about £100 million (approximately $134 million). This move raised additional concerns among investors about fiscal discipline. The European Central Bank was expected to hold rates steady at its meeting that day to assess the actual economic impact of the renewed Middle East tensions.
AI Funding Wave Hits Bond Market, Weighing on Long-End Yields
According to Bloomberg, the heavy issuance of long-term bonds by tech companies to finance AI infrastructure is competing with US Treasuries for the same pool of buyers, acting as a structural factor keeping long-end yields high.
AI-related financing has now surpassed $500 billion. Alphabet's earnings report showed continued expansion in AI capital expenditure. Tesla's spending on AI and robotics projects surged to $5.8 billion in the second quarter, leading to its first cash consumption in two years. Shares of both companies fell sharply in pre-market trading. "Whether it's governments, hyperscale cloud providers, or other issuers, credit bonds are now competing for the same investors with more borrowers on the long end," said Tony Rodriguez of Nuveen Asset Management.
Alex Payne of Vanguard Capital Management noted that traditional buyers of 30-year Treasuries, such as pension funds and insurance companies, now have "a richer menu of choices than ever before," suggesting that yields may not have peaked yet.
Since 2007, the US Treasury market has ballooned from $4.5 trillion to $31 trillion, with debt-to-GDP doubling to over 100%. Against the backdrop of both the AI capital expenditure wave and deteriorating fiscal conditions, fund managers generally believe that long-end yields above 5% are no longer a fleeting phenomenon.
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