Bond sell-off persists after China’s Golden Week break
As investors in China returned from the National Day holiday, they came back to a familiar picture: global developed-market bonds, led by U.S. Treasuries, were still under heavy selling pressure.
On Wednesday, a fresh wave of selling pushed the 10-year U.S. Treasury yield as high as 5.36%, while the 30-year yield reached 5.73%. Both marked the highest levels since 2002. Benchmark sovereign yields in France and Italy also moved sharply higher, and the UK 30-year gilt yield touched its highest point since 1998.
Bond prices and yields move in opposite directions. Later on Thursday, long-dated Treasury yields eased in New York afternoon trading after the U.S. Treasury sold $39 billion in 10-year notes and drew strong demand. Even so, the auction stopped at 5.3%, the highest accepted yield for a 10-year Treasury sale since November 2000.
The Treasury was also set to sell $22 billion in 30-year bonds on Thursday, with the issuance yield also likely to mark the highest level since 2000. After that, the department was scheduled to conduct long-bond buybacks of as much as $6 billion in Treasuries maturing in 20 to 30 years.
In short, the strain across global bond markets did not improve much during the holiday period. If anything, more pressure points emerged.
Rate expectations, oil and Europe’s fiscal tensions are all in play
Expectations for Federal Reserve policy have kept shifting. Since the Fed’s September meeting, the market’s view on another rate hike in October has swung repeatedly. LSEG data showed the probability of an October hike had fallen to 22%, down from about 70% at the start of last week, though traders still expect several hikes over the next year.
Geopolitics remains another focal point. Iran has stepped up attacks in recent days on tankers passing through the Strait of Hormuz, helping lift oil prices. Throughout the Golden Week holiday, Brent crude stayed near the $100 level.
Simon Ballard, chief economist at First Abu Dhabi Bank, said, 「Clearly, the shadow cast by the geopolitical backdrop, and the related persistence of price pressures and rising government bond yields, is continuing to weigh on sentiment and broader risk appetite.」
In Europe, France has become a new flashpoint in the long-bond sell-off. Budget negotiations and the nationwide protests that followed have kept investors on edge.
Tradeweb data showed the French 10-year yield jumped nearly 14 basis points on Wednesday to 4.889%. For comparison, the German 10-year yield rose only 3.3 basis points to 3.507%. The spread between French and German 10-year bonds stood at 139 basis points, again approaching the near-159-basis-point peak touched last Friday.
Mitch Reznick, head of cross-sector credit at Federated Hermes Limited, wrote in a report, 「France is rapidly becoming the focal point of Europe’s bond sell-off. The speed of this move matters. Investors are selling French government bonds and rotating into higher-quality German debt, which is widening the spread further.」
Wall Street is split on where Treasury yields end the year
Strategists remain divided over whether Treasury yields will fall sharply by year-end or push to new highs.
One camp, represented by Goldman Sachs’ William Marshall, still expects yields to move lower. Their view is that markets have overreacted to worries about sticky inflation and large U.S. government debt issuance, creating room for a Treasury rebound before the end of the year.
The opposing camp, including Barclays’ head of U.S. rates strategy Anshul Pradhan, argues that yields can keep climbing and stay elevated for longer.
That said, neither side sees the path ahead as easy to call. A range of uncertainties is clouding the outlook: the energy-price shock tied to the Iran war, a possible Fed turn back toward additional rate hikes, and the AI wave that is still injecting momentum into the economy.
The bearish case: long-end yields could still test 6%
Barclays has raised its forecast for the 10-year Treasury yield in the third quarter of 2027 to 5.25% from 5%, and says there is little in the near term that would push yields meaningfully lower.
「As long as the U.S. economy remains resilient, it is hard to see a clear catalyst for yields to fall below 5% right now,」 Pradhan wrote in a recent report. He added that the 30-year Treasury yield could reach 6% if the economy stays firm.
He also wrote, 「The market is still discounting a long-run neutral rate of around 3.5%, and we think there is room over time for productivity to surprise to the upside. If that happens, the market may reprice that long-run rate higher. In our view, that would push the 30-year yield toward 6%, or at least imply fair value around a 6% yield for the 30-year bond.」
Analysts at Danske Bank also said long-dated U.S. government bonds face the risk of further pressure.
Jens Peter Sorensen, the bank’s chief analyst, wrote, 「Pressure is concentrated at the long end of the Treasury curve, driven not only by heavy Treasury supply but also by bond issuance from hyperscale cloud service providers. As investors demand a higher term premium at the long end, we do see a risk that 10-year and 30-year Treasury yields could touch 6%.」
Bank of America currently expects the 10-year Treasury yield to be at 5% by year-end. That aligns with the bank economists’ rate-path view that the Fed will raise rates at its next two meetings in October and December, bringing the economy back to what they describe as “equilibrium.” Still, the team led by co-head of global rates strategy Mark Cabana has already laid out a set of trade ideas based on the possibility that yields may continue to move higher.
Cabana said, 「We do not think this is the time to fade the move. Even though our yield forecast is lower, and even though we still base our view on our core U.S. economic scenario, the balance of risks suggests rates are more likely to move higher from here than lower.」
The bullish case: near-6% yields are starting to attract buyers
Some market participants argue that long-end yields moving closer to 6% are now attractive enough to bring buyers back and help drive a bond-market rebound before year-end. The strong 10-year Treasury auction on Wednesday was seen as evidence that some investors are stepping in to buy long-dated bonds.
Goldman Sachs expects the 10-year Treasury yield to fall to 4.75% by year-end, almost 60 basis points below Wednesday’s high.
William Marshall, head of U.S. rates strategy at Goldman Sachs, said, 「I think our constructive medium-term outlook still makes sense. Underlying inflation pressures have been brought under reasonably good control. What is keeping inflation high now is either something largely in the past, such as tariffs, or events like Iran’s ‘ongoing conflict.’ Our base case is that these factors ultimately ease, and the market’s focus then returns to more fundamental structural drivers.」
JPMorgan expects the 10-year Treasury yield to fall to 5.05% by year-end, which it says would mark the first return to fair value in six months.
Morgan Stanley expects the 10-year yield to drop to 4.8% by the end of the year.
Martin Tobias, a rates strategist at Morgan Stanley, said, 「The hawkishness currently priced by the market is much more pessimistic than the probability-weighted Fed path expected by our economics team. By comparison, our bearish base case for the 10-year Treasury yield is 5.25%, and the cash market has already fully priced that outcome. Our bullish base case, tied to a deep recession caused by a global oil shock, would imply a yield of 3.8%. Since forward contracts have effectively priced in the bearish scenario, we think the balance of risks is more favorable to lower Treasury yields.」