The sharp selloff in U.S. Treasuries may not be over yet, as investors continue to grapple with persistent inflation, uncertainty around interest rates, and shifting dynamics in the bond market, according to analysts cited by Reuters.
Benchmark U.S. Treasury yields surged on Tuesday, with the 10-year yield climbing to its highest level since January last year at 4.671%. Meanwhile, the 30-year Treasury yield rose above 5% for the first time since 2007, touching 5.178%, reflecting growing concerns that borrowing costs could remain elevated for longer.
For several months, investors had considered the 4.5% mark on the 10-year Treasury as an attractive entry point for buying bonds. However, as yields moved decisively above that level, market participants reassessed where demand might emerge next, as per the Reuters report.
Analysts believe the current environment resembles a difficult transition period for markets. Unlike the pandemic era, when central banks were aggressively cutting rates, policymakers are now battling stubborn inflation while economic uncertainty persists. This has made bond market movements more volatile and unpredictable.
According to Reuters, experts warned that the selloff could continue as technical pressures build in the market.
Inflation remains the key concern driving Treasury yields higher. Recent consumer and producer price data in the United States came in stronger than expected, reinforcing fears that inflationary pressures are proving more persistent than investors had anticipated.
Market participants are now closely watching upcoming economic data for May to determine whether inflation is easing or becoming entrenched. If investors conclude that inflation will stay elevated, they are likely to demand even higher yields to compensate for the erosion of purchasing power.
Market-based inflation expectations, measured through breakeven rates, recently climbed to a three-year high before easing slightly. Analysts say even a modest increase in inflation expectations could trigger another leg higher in Treasury yields.
The growing belief that the U.S. Federal Reserve may keep interest rates elevated for longer, or potentially raise rates again if inflation fails to cool, has also contributed to the rise in yields, particularly at the short end of the curve.
Experts also said that investors are increasingly accepting that the market is operating in a fundamentally different interest-rate environment compared to recent years.
Geopolitical tensions have added another layer of uncertainty. The lack of positive developments regarding Iran, combined with inflation concerns, has reinforced the market’s move toward repricing bonds at higher yields.
At the longer end of the Treasury curve, analysts see additional risks. Once the 30-year Treasury yield crossed the 5% threshold, some strategists argued that the market effectively lost a clear upper boundary for yields.
Another structural shift adding pressure to the Treasury market is the changing profile of buyers. Traditionally, large foreign holders such as China and other trade-surplus nations were relatively stable buyers of U.S. government debt.
A greater share of Treasury holdings is linked to financial hubs such as the United Kingdom, Belgium, Luxembourg, and the Cayman Islands, where hedge funds and other market-driven investors tend to be more sensitive to price fluctuations.
The United Kingdom overtook China last year as the second-largest foreign holder of U.S. Treasuries and now owns nearly $900 billion worth of government debt.
Analysts say this shift means higher yields may no longer attract buyers as quickly as they once did. Investors are becoming more selective, potentially allowing yields to climb further before demand returns in a meaningful way.
With inflation concerns still dominating market sentiment, analysts cited by Reuters believe the Treasury selloff may have further room to run in the coming months.
