US Treasuries Post Steepest Quarterly Slide Since 1994 as Yields Climb to Two-Decade Highs

Global bond markets remain under strain as investors price in further Federal Reserve rate hikes

NEWYORK: The US government bond market has closed out its weakest quarter in more than three decades. According to LSEG data, the yield on the benchmark 10-year Treasury rose by 87.1 basis points during the July–September quarter, its sharpest quarterly increase since 1994. Bond yields move in the opposite direction to prices.

The selling continued into the new quarter. On Thursday, US yields reached two-decade highs for the seventh session in a row, before a decline in oil prices brought some calm to a market rattled by its worst quarter this century, Reuters reported. The 10-year yield, which serves as a reference point for borrowing costs and asset valuations worldwide, rose as high as 5.31%, its highest level since 2007, before easing to just under 5.28%. The 30-year yield climbed above 5.65%, a level last seen in 2002.

The pressure is not limited to the United States. Yields have risen sharply across the globe, driven by surging energy costs that are feeding inflation and by the artificial intelligence and data centre boom, which has raised expectations for economic growth and for the level at which short-term interest rates will eventually settle. European bond futures and government bond markets in Australia, South Korea and Japan also came under pressure on Thursday. Analysts have further pointed to worries over the US fiscal outlook and heavy borrowing by both governments and corporations, particularly to fund the expensive build-out of AI infrastructure.

Market expectations for US monetary policy have shifted dramatically. Traders, who had earlier anticipated rate cuts this year, have reversed course; following last month’s rate hike, they are now pricing in at least three additional increases by the Federal Reserve before mid-2027.

Andrew Lilley, chief rates strategist at Sydney-based investment bank Barrenjoey, described the sell-off as “the Treasury bear market that had to happen.” He argued that markets had been stuck in an unstable situation in which core inflation remained too high while the Fed had not responded. Lilley said he believes the end of the decline may be approaching, though he cautioned that higher bond returns could test the resilience seen in other asset markets.

The rise in yields carries broad economic consequences. Higher rates increase financing costs for businesses and homebuyers, and force governments to devote more of their budgets to interest payments, leaving less for social spending.