The rate increase explained

The US 10-year Treasury yield passed 5.2 percent on Monday for the first time since June 2007, according to ForexLive (investinglive.com). The yield rose about five basis points on the day, following a rise of more than ten basis points last Thursday. The 30-year yield has meanwhile climbed to around 5.5 percent, the highest since 2004.

The move is not coming from rising inflation expectations, but from what are called real yields — the portion of the interest rate not tied to expected price increases. A senior economist at Aberdeen points out that the two-year "breakeven" rate, which measures market inflation expectations, has been nearly unchanged this week and remains well below the peaks seen earlier this year.

Weak demand at auctions

What is moving, however, is investors' willingness to absorb new government debt. This week's seven-year auction had the weakest bid-to-cover ratio in a full year, and indirect demand — which often includes foreign central banks — pulled back. Short-term T-bill auctions have also shown weak interest. According to the Aberdeen economist, this suggests growing investor reluctance to take on US government debt, particularly as the probability of further Fed tightening increases.

10-year US yield hits 5.2% – highest since 2007 after weak auctions - Bilde 1

Fed expectations drive the market

5.2%
10-year yield
5.5%
30-year yield
70%
probability of Fed hike in October

The market is now pricing in around 70 percent probability that the Federal Reserve will raise rates in October, and nearly 60 percent that the committee will carry out hikes in both October and December. Fed Governor Lisa Cook said on Monday that she expects AI investments and higher oil prices to keep inflation elevated, and that further hikes will depend on incoming data. The central bank has already raised rates once this month.

It is not inflation fears, but fear over who will buy all the new government debt, that is driving yields higher.

This reflects a broader structural problem: the US budget deficit stands at around $1.8–1.9 trillion annually, nearly double the fifty-year average of 3.8 percent of GDP. Government debt now exceeds 100 percent of GDP, and the Congressional Budget Office (CBO) estimates it could reach 120 percent by 2036 — above the post-war record of 106 percent. Net interest expenses on government debt have already surpassed $1 trillion annually, absorbing 18–22 percent of all federal tax revenues. This dynamic likely explains why investors are demanding higher compensation to hold long-term US government debt, regardless of the inflation outlook.

10-year US yield hits 5.2% – highest since 2007 after weak auctions - Bilde 2

Consequences in the real economy

Higher rates are quickly feeding through into the economy. The average 30-year mortgage rate in the US now stands at around 7.1 percent, the highest in over two years, according to ForexLive. Analysts have pointed out that a sustained break above 5.2 percent on the 10-year could keep the dollar strong, while putting pressure on gold and risk assets in general. The S&P 500 has so far held up within a few percent of record levels, but a further rise in real yields will test this resilience.

Oil prices, meanwhile, have recovered on news related to Iran, but the message from the bond market is clear: it is the supply side of the government debt market and Fed policy, not energy prices, that is now driving rate movements.

Global spillover effect

The pressure is not isolated to the US. The German 10-year Bund yield has reached its highest level since 2011, and British government bond yields (gilts) have also risen. This underscores that the market is now pricing in a broader period of higher global real yields, not just US-specific conditions.

Norwegian angle

For Norway, this is relevant on several levels. The Government Pension Fund Global (Oljefondet) has large exposures to US government bonds and global equity markets, and a continued rise in yields could affect the fund's returns in the short term through lower bond prices. At the same time, a stronger dollar, which analysts expect if the rate increase continues, could affect the krone exchange rate and imported price growth. Oil price movements linked to Iran tensions are also directly relevant to the Norwegian economy and the state budget, although the article emphasizes that it is now the bond market, not energy prices, that is the main story.

Divided opinions on further developments

Experts are far from unanimous on how high rates can go. Karen Ward of J.P. Morgan Asset Management believes the 10-year yield probably will not rise much above 5 percent, according to a quote cited by Seoul Economic Daily. ING, on the other hand, has suggested the yield could reach 6 percent in the near future. A Bloomberg survey among 173 market experts found that slightly more than half expect the 30-year yield to exceed 6 percent during the year.

It is worth noting that such forecasts vary considerably from firm to firm, and should be read as uncertain estimates rather than a definitive answer. A market analyst has pointed out that the 10-year yield now sits just below technical resistance at 5.25 percent — a level dating back to July 2007 — and a break above this could open the door to further gains.

Market attention now turns to upcoming US macroeconomic data, new Treasury auctions, and signals from Fed members about the probability of an October rate hike.