Google Trends: Why US Treasury yields are hitting levels not seen in decades

Since the US-Iran war began, it has risen around 135 basis points. That is a steep climb in a short time. The latest: yields cool, but only a little The 10-year yield edged up to 5.12% on Friday after falling sharply in the previous session. A global equity selloff boosted safe-haven demand for government bonds. Investors are also pricing in a possible slowdown in the AI capital expenditure boom, a major driver of the US economy and markets.

On Thursday, the 10-year fell to an intraday low of 5.038%, its lowest in three weeks. It was on track for its biggest single-day fall since 2024. The 30-year yield rose to 5.46% on October 16, up 0.05 percentage points from the previous session. Over the past month, it has edged up 0.17 points. It is 0.85 points higher than a year ago. The fall came despite hot inflation data. The Producer Price Index rose 1.3% in September, up from 0.5% in August.

Wholesale prices rose 6.3% from a year ago, the biggest increase since 2022. Markets see roughly a 72% probability that the Fed leaves rates unchanged this month. The likelihood of a December hike has climbed to 92%. Stronger-than-expected US data has reinforced expectations of further hikes. Cleveland Fed President Beth Hammack cautioned that the Fed may need to raise rates more aggressively if public inflation expectations deteriorate significantly.

Why are yields rising? Oil is the first suspect Inflation had fallen to 2.4% in February, before the war began. Fighting around the Strait of Hormuz has since pushed oil prices sharply higher. In mid-September, Brent traded above $107, up over 20% in a month. Higher energy costs feed into inflation expectations, and 10-year yields track those closely. September CPI came in at 3.7%, above the Fed's 2% target.

Is the Fed really hiking again? Yes. On September 16, the Fed raised rates by 25 basis points to the 3.75%-4.00% range. Fed Chair Kevin Warsh said, "inflation is too high and has been for too long". Most FOMC members now expect two hikes in total this year. Investors who expect higher rates for longer demand higher yields on bonds. Chair Warsh's remarks at this week's IMF summit support the expectation that interest rates will stay the same this month.

He did not indicate if another rate hike is being considered and mentioned that recent higher-than-expected inflation has not changed his view of the US economy. Is the US debt pile the bigger problem? US government debt has crossed $40 trillion. Net interest spending now tops $1 trillion a year and rivals defence spending. The government keeps issuing bonds to fund a large deficit, and more supply means fewer eager buyers.

The Treasury tried to calm things with buybacks, starting with $6 billion. Yields kept rising. The gap between 10-year and 30-year yields reached about 37 basis points. It shows investors want extra pay for holding long-term debt. That extra pay is called the term premium. How much blame does the AI boom carry? ING estimates AI explains about one-fifth of the recent rise in long-dated yields. Most of that comes from growth hopes, with only a smaller share from AI-related borrowing.

Merrill sees a "crowding-out" effect. Big tech has issued nearly $280 billion of debt this year, and those bonds compete with Treasuries for the same pool of money. PIMCO's Christian Stracke goes furthest and names AI capital demand as the main driver. How have markets reacted? Rising yields hurt growth stocks the most. Heavily indebted AI companies face extra pressure. They cut the present value of future earnings, and AI firms rely on those earnings for valuations.

Morgan Stanley strategists see the S&P 500 dropping as much as 7% if energy prices and bond volatility rise further. The dollar index rose 0.7% on Wednesday to 102.909, its highest in 18 months. Borrowers are feeling it too. 30-year mortgage rates are nearly 7.4%, close to a three-year high. Many homeowners are holding on to existing loans instead of refinancing. What does it mean for Indian investors?

Higher US yields narrow the return gap between sovereign-backed US Treasuries and riskier emerging market stocks. Foreign investors may then pull money out of Indian equities. US Treasuries and short-term Treasury ETFs yielded roughly 4.7% to 5% in September. Is this only a US story? No. Germany's 10-year Bund yield briefly rose above 3.5%, its highest in 17 years. Japan's 10-year yield hit its highest since 1996.

French 10-year yields touched 4.993%, the highest since 2002. Governments everywhere are paying more to borrow. Will yields stay high? A WSJ survey suggests so. Economists expect the 10-year yield to end 2026 at 5.1%. They see 4.96% by mid-2027 and 4.78% by the end of 2027. They put the chance of a US recession at 24%. Many see debt and AI spending keeping yields elevated even if oil eases. Bottom line The latest dip is a pause, not a turn.

Oil, hot inflation, heavy debt and AI borrowing are all still in play. The Fed's next steps will decide the next move. Investors should watch the October 27-28 meeting and the December hike odds. Disclaimer: This article is for informational purposes only and does not constitute investment advice. Readers should consult a qualified financial advisor before making any investment decisions.