The 10-year U.S. Treasury yield rises above 5.14% as tech stock rebound weakens demand for safe havens; Fed rate hike expectations heat up again

According to Zhihui Finance APP, as US tech stocks strongly rebounded, weakening the demand for safe-haven assets, US Treasuries generally declined on Monday, pushing yields across various maturities higher by 6 to 8 basis points. The yield on the 10-year Treasury rose more than 6 basis points to 5.14%, approaching the multi-year high recently reached. Meanwhile, traders have increased their bets on a rate hike by the Federal Reserve next year and continue to expect the Fed to raise rates by 25 basis points this December.

On Monday, US tech stocks rebounded after last week's steep selloff, with artificial intelligence (AI)-related shares once again attracting investor interest, as the Nasdaq 100 Index rose 1.2%. Previously, the index had posted its largest weekly drop since April 2025, temporarily driving funds into the US Treasury market to hedge against equity market declines.

Gennadiy Goldberg, head of US Rates Strategy at TD Securities, said that given the recent sharp declines and rebounds in the market, investor positioning remains fragile, and many continue to sit on the sidelines, further amplifying daily volatility in the markets.

Over the past week, the main drivers of the US Treasury market have shifted significantly. Previously, the sharp fall in tech stocks had spurred demand for safe-haven assets, temporarily supporting Treasury prices and causing investors to overlook inflation risks from rising oil prices. However, with the rebound in tech stocks, the market's attention has shifted back to energy prices and the Fed's future rate policy.

On Monday, higher oil prices further intensified selling pressure on Treasuries. US benchmark West Texas Intermediate (WTI) crude futures rose 2.2%, closing at the highest level in a month; international benchmark Brent crude touched a five-month high intraday but ended lower at the close.

Since the end of February this year, when the US launched strikes against Iran, Middle Eastern oil supply has been disrupted, sharply driving up international oil prices, which has become an important factor influencing US Treasury yields. Persistently high energy prices are pushing up US inflation, prompting the Fed to implement its first rate hike since 2023.

However, last week's tech selloff temporarily overshadowed inflation concerns, weakening the multi-month correlation between Treasuries and oil prices. As equity markets stabilized and rebounded, investors again turned their attention to the possibility that higher oil prices could keep inflation elevated and force the Fed to maintain a tighter monetary policy stance.

UBS US rate strategists recently raised their year-end target for the 10-year Treasury yield to 5.2%. The bank said the adjustment was mainly based on three factors: a potentially more hawkish Fed policy path, limited short-term improvement in inflation, and an upward revision of oil price forecasts.

Currently, the market still expects the Fed to raise rates by 25 basis points in December, but there remains divergence over whether a hike will occur at the next FOMC meeting on October 28. The rate market now reflects about a 20% probability for an October hike. US September inflation data released last week exceeded expectations, once driving the probability of an October hike above 50%, but as US stocks later fell, related bets cooled off.

Some bond strategists believe there is still short-term rebound potential for US Treasuries. If the Fed keeps rates unchanged at its October meeting, the market may further trim expectations for near-term hikes, thus pushing up short-term Treasury prices.

Apart from changes in equity markets and monetary policy expectations, US corporate bond issuance has also put pressure on the Treasury market.

Goldberg pointed out that on Monday, several major companies entered the bond market for financing, attracting funds that might otherwise have flowed into US Treasuries. Walmart (WMT.US) unexpectedly launched a bond issuance plan to support business expansion, while Kimberly-Clark (KMB.US) issued bonds as planned to fund its acquisition of Tylenol manufacturer Kenvue (KVUE.US).

Reportedly, Kimberly-Clark needs to raise nearly $7 billion in cash for the purchase, and Walmart is also seeking financing to expand investment spending. Increased supply of corporate bonds gives investors more fixed-income assets to choose from, further weakening demand for Treasuries.

Meanwhile, European government bond yields also rose broadly, putting additional pressure on US Treasuries. Among them, French government bonds led losses in European debt markets, with the 10-year French government bond yield jumping 14 basis points to nearly 4.95% on Monday, the highest level since 2002.

France experienced unrest related to living costs over the past weekend, further heightening concerns about the country's political and fiscal outlook. Given France's large fiscal deficit in the Eurozone, investors are also worried that Moody's may downgrade the nation's sovereign credit rating this Friday.