Over half of market participants expect 30-year US Treasury yield to hit 6% by year-end

The 10-year U.S. Treasury yield has breached the 5% threshold, yet upward pressure on long-term interest rates persists. Meanwhile, shifts in the composition of U.S. Treasury buyers are making the market more prone to sharp volatility.

Persistent inflation above target, a resilient U.S. economy, the Federal Reserve's renewed tightening cycle, and expanding fiscal financing needs are collectively driving long-term Treasury yields higher. At the same time, price-insensitive foreign official investors are gradually reducing their participation, while hedge funds and other price-sensitive investors are absorbing a larger share of Treasury issuance. This shift means the market may become more sensitive to changes in capital flows.

On Wednesday, the 10-year U.S. Treasury yield rose 14 basis points in a single day, briefly surpassing 5.1%—a level not seen since 2007. The 5-year yield also broke above 5%, reaching its highest since 2007. Japan's 10-year government bond yield rose on Thursday to its highest level since 1996, as global bond markets faced synchronized pressure.

Inflation Remains Elevated, Economy Still Resilient

The latest yield surge is fundamentally supported. The U.S. core PCE price index rose 3.7% year-over-year in July, still significantly above the Fed's 2% target. Rising oil prices have added uncertainty to the inflation outlook; if energy prices remain elevated, they could further prolong the time needed for inflation to cool.

At the same time, the U.S. economy has not shown clear signs of slowing. The labor market remains stable, consumer spending is supported, and the investment boom driven by AI data center construction is boosting corporate capital expenditure.

Economic resilience gives the Fed little urgent reason to pivot toward easing. The Fed recently raised its policy rate by 25 basis points to a range of 3.75%–4%. Fed Governor Michael Barr stated that with inflation still above target and economic growth strong, further policy adjustments may still be necessary. Chicago Fed President Austan Goolsbee noted that the path for inflation to return to 2% will not be smooth.

Thus, long-end yields face triple pressure from inflation, growth, and monetary policy—not merely a short-term oil price shock.

Treasury Buyer Base Becomes More "Fragile," Market Volatility Risk Rises

The supply side is also exerting pressure on the Treasury market. The U.S. fiscal deficit remains large, and ongoing financing needs mean the market must absorb a substantial volume of new Treasury issuance. Additionally, large technology companies are increasing debt financing for AI infrastructure investments, further boosting demand for long-term capital.

More notably, the composition of buyers is changing. Research from the New York Fed shows that participation by price-insensitive foreign official investors has declined, while the role of hedge funds and private investors has grown.

Compared to the former, hedge funds and other market-driven investors are more focused on yields, prices, and financing conditions. When yields are sufficiently high, such capital can absorb new Treasury issuance. However, if the market adjusts rapidly, their positions may also shift, making bond demand more elastic.

This means that with rising new supply and fewer stable buyers, the Treasury market may need higher yields to attract capital. Once yields rise quickly, falling bond prices could trigger stop-losses, margin pressures, and forced deleveraging, further amplifying market volatility.

Therefore, the key concern is not whether hedge funds will exit, but that as the Treasury market becomes more dependent on price-sensitive capital, the impact of supply-demand changes on yields could be magnified.

After 5%, What Does the Market Watch Next?

A 10-year Treasury yield of 5% is not an all-time high, but it is enough to prompt the market to reassess the long-term neutral interest rate.

A Bloomberg survey of market participants showed that more than half of respondents expect the 30-year U.S. Treasury yield to reach 6% by year-end. This does not mean 6% is certain, but it reflects growing market concern that long-term rates will continue to rise.

At the same time, a 5% yield also increases the attractiveness of Treasuries for long-term capital. Compared to the low-rate environment after the financial crisis, U.S. government bonds now offer higher nominal returns, which may lead some capital to reallocate toward fixed-income assets.

Thus, the key factors ahead include not only inflation and the Fed, but also the scale of U.S. fiscal financing and whether the market can sustainably absorb new Treasury issuance. If stable buyers continue to decline and the share of price-sensitive capital rises further, Treasury yields may react more violently to market shocks.

This article is reprinted from "Wall Street Sights." Edited by Feng Qiuyi, Zhitong Finance.