Why are US Treasury yields rising as global bonds face their worst month in years?

Global bonds edged higher on Wednesday, but they were still on track for their worst month in years. The main pressure is coming from weak government finances, a large supply of new debt and rising inflation.US Treasury yields rise as global bonds face pressure from inflation, debt and high oil prices. (Bloomberg file photo for representation)Energy costs have also stayed high as the seven-month-old US-Israeli war on Iran continues to affect oil supplies and prices. Reuters reported these factors as key reasons behind the pressure on global bonds.US Treasury yields are rising sharplyThe benchmark 10-year US Treasury yield was at 5.209% in early European trading on Wednesday. It was slightly below its highest level since June 2007. The yield was down 4.6 basis points on the day but was still on track to rise by more than 45 basis points in September.That would be its biggest monthly rise in about two years, showing how sharply borrowing costs have increased. Bond yields and bond prices move in opposite directions, so rising yields reflect continued pressure on Treasury prices.Why are yields rising?Investors are worried about the financial condition of governments and the amount of debt they need to issue. A large supply of government debt can put pressure on bond prices, pushing yields higher. Inflation is another major concern, especially because higher energy prices can keep inflation elevated.The ongoing Middle East conflict has kept oil prices high, adding to concerns about future inflation. Higher inflation can also make investors expect interest rates to stay higher for longer, putting further pressure on bond yields.The 2-year Treasury yield also remains highThe 2-year US Treasury yield fell 1.9 basis points to 4.870% on Wednesday. The decline came after New York Federal Reserve President John Williams pushed back against expectations of an earlier tightening of monetary policy. Even after Wednesday's fall, the 2-year yield was still more than 50 basis points higher for September.Also read: Gold price today: Why is gold near a 7-week low as oil prices rise?Government bond yields are closely watched because they act as an anchor for global financial markets. They also provide a reference point for investors deciding how attractive stocks and other riskier assets are.Treasury yields also influence mortgage rates and corporate borrowing costs. This means the recent rise in yields is not limited to the bond market. It can affect borrowing costs for households and companies as well.Investors are watching whether high yields could hurt stocksCarlo Franchini, head of institutional clients at Milan-based Banca Ifigest, said current yield levels are becoming significant. He warned that investors could start considering moving money away from equities if borrowing costs remain high, according to Reuters.However, he said he was not yet taking profits on stocks. He expects equities could remain supported into October if tensions around the Strait of Hormuz ease. Lower tensions could help bring oil prices down and reduce some of the pressure on bond yields, according to Franchini.US stocks have so far remained relatively strongDespite the sharp rise in government bond yields, stock markets have remained broadly resilient. Strong corporate earnings, a solid global economy and continued enthusiasm around artificial intelligence have helped support stocks, according to Reuters. This has meant that investors have not moved away from equities as sharply as the rise in bond yields might have suggested.European and Asian stocks showed mixed movesEurope's STOXX 600 was up 0.6% at 0812 GMT on Wednesday. However, the index was still heading for a 1.4% monthly loss and was broadly unchanged for the quarter. MSCI's broadest index of Asia-Pacific shares excluding Japan rose 0.3% but was heading for a 1.1% monthly fall.Japan's Nikkei jumped 1.9% and was on track for a 0.6% monthly gain, although it was still set to fall 4.7% for the quarter. South Korea's Kospi was headed for a 0.3% monthly gain but a 19% quarterly decline.US stock futures slightly higherNasdaq futures rose about 0.2%. S&P 500 futures gained nearly 0.3%. Citi's Asia-Pacific trading strategy head Mohammed Apabhai said the resilience of equity markets was surprising given the rise in bond yields. He linked some of the optimism to nominal GDP growth and expectations for stronger corporate earnings. Apabhai said in a Citi note cited by Reuters. He added that US equity markets were responding to higher yields, but the impact was being seen outside the technology sector more clearly.Chinese stocks remain under pressureChina's blue-chip CSI 300 index gained 0.3% on Wednesday. However, it was still struggling to recover from a one-year low reached earlier in the week. The index was on course for a 12% quarterly decline. That would be its biggest quarterly fall since the height of China's COVID-19 lockdowns.German and French bond yields have also surgedThe rise in yields is not limited to the US. 10-year German government bond yields reached their highest level in 17 years this week. They were heading for a rise of about 70 basis points for the quarter. 10-year French government bond yields reached an 18-year high and were on track to rise by about 120 basis points for the quarter.Japan's bond yields Japan's 10-year government bond yield remained close to multi-decade highs. It was heading for a 38-basis-point increase during the quarter. This shows that the pressure on government bond markets is happening across several major economies rather than only in the US.The dollar is benefiting from higher US yieldsThe US dollar was on track for a monthly gain of about 2%. Higher US Treasury yields have helped support the dollar by making US assets more attractive to investors. The dollar was down just 0.1% on Wednesday, but remained stronger for the month.Also read: Why are Dow, S&P 500 and Nasdaq futures wavering today? AI concerns, oil prices in focusThe euro is under pressureThe euro traded just above a 16-month low at $1.1346. It was heading for a 2.3% monthly loss. The currency has been pressured by the global energy shock and rising political risks in Europe, according to Reuters.The British pound rose 0.2% to $1.326 on Wednesday. Despite that daily gain, sterling was still heading for a 2.1% monthly loss.The Japanese yen rose 0.2% to 156.95 per dollar. It was heading for a 1.7% monthly gain. Investors have been cautious about pushing the yen lower because of the possibility of joint intervention by Tokyo and Washington. Reuters reported.Oil prices remain high US crude was almost unchanged at $89.41 a barrel. Brent crude slipped 0.1% to $102.47 a barrel. Both were still heading for monthly gains. The gains are linked to concerns that the ongoing Middle East war could cause long-lasting supply disruptions.The elevated oil prices are important for bond markets because expensive energy can keep inflation high. Higher inflation can increase concerns that interest rates may need to remain high, which can push government bond yields higher. This creates another link between the Middle East conflict, oil prices, inflation and Treasury yields.US Treasury yields are rising as investors deal with heavy government borrowing, large debt issuance, inflation concerns and high energy prices. The 10-year Treasury yield being close to its highest level since 2007 shows how significant the recent move has been.The pressure is also visible in major European and Japanese bond markets. So far, stocks have remained more resilient than bonds, helped by earnings growth, economic strength and AI enthusiasm. But investors are watching whether higher borrowing costs and elevated oil prices eventually put more pressure on stocks and the wider global economy.