US Treasury Yields Surge to 4.62% in Five Weeks: Reflation Trade Dominates as Rate-Cut Bets Fade
U.S. Treasury Yields Surge for Five Consecutive Weeks: “Reflation Trade” Dominates Markets as Rate-Cut Expectations Recede Substantially
On May 17, the yield on the 10-year U.S. Treasury note hit an intraday high of 4.618%, nearing the critical psychological and technical resistance level of 4.62%—a rise of 88.5 basis points (bps) from its April 19 low of 3.733%. Its weekly gain of 23.9 bps marked the steepest and most sustained ascent since the start of 2024. This phenomenon is far more than a short-term fluctuation; rather, it reflects a fundamental repricing of market expectations driven by converging macroeconomic forces: the possibility of no rate cuts—or even potential hikes—is now being incorporated into mainstream scenarios, and the “reflation narrative” has evolved from a fringe discussion into a core premise guiding asset allocation.
Persistent Inflation Exceeds Expectations: Data-Driven Revisions to Forecasts
U.S. CPI rose 3.4% year-on-year in April, with core CPI at 3.6%—both notably above consensus forecasts of 3.3% and 3.4%, respectively. Although the PCE price index softened slightly, the core PCE index—excluding food and energy—rose 0.3% month-on-month, underscoring the stickiness of services-sector inflation. Critically, signs of a wage-price spiral have re-emerged: average hourly earnings rose 0.3% month-on-month in April, maintaining an annualized growth rate of 4.2%; meanwhile, job openings (per the JOLTS report) remain above 8.9 million, indicating no meaningful loosening in labor-market conditions. Markets are now recognizing that the Federal Reserve’s previously emphasized “downward path” for inflation is unlikely to be linear—and may instead follow a volatile, zigzag pattern. Goldman Sachs’ latest report states: “The current persistence of inflation extends well beyond the ‘last mile’—it increasingly resembles structural repricing.” This insight directly undermines earlier optimism about 2024 rate cuts: per the CME FedWatch Tool, the probability of a first cut in June has plunged from 72% in early March to under 15%; the expected total number of cuts this year has been revised downward from three to just one—most likely delayed until December.
Fiscal Expansion Signals Intensify: Trump Policy Shift Amplifies Reflation Concerns
Market anxiety over the sustainability of U.S. fiscal deficits is escalating sharply. The Trump campaign has recently issued a series of unambiguous signals: if elected, it would advance large-scale tax cuts—including reductions in both personal and corporate income taxes—revive major infrastructure initiatives, and significantly boost defense spending. Bloomberg’s fiscal model estimates that this policy package could widen the federal deficit by over $2 trillion over the next decade. Even more critically, the incumbent administration shows no sign of fiscal restraint: implementation of funding authorized under President Biden’s CHIPS and Science Act and Inflation Reduction Act is accelerating, and the FY2024 budget deficit is projected at $1.6 trillion. The risk of policy “misalignment” between monetary and fiscal authorities is growing pronounced—while the Fed seeks to tighten policy to curb demand, the Treasury is injecting massive liquidity via debt issuance. Concurrently, U.S. Treasury supply pressure is mounting: the Treasury Department has raised its May auction size to $118 billion and plans to increase it further to $122 billion in June. Supply-demand imbalances, coupled with upward revisions to inflation expectations, have made long-end yields the most direct pricing mechanism for the cost of fiscal expansion.
Geopolitical Premium: Dual Drivers—Risk Aversion and Supply Shocks
The Middle East situation is evolving from a mere “risk premium” into a source of material disruption. Anticipation of renewed U.S.-Israeli military action against Iran has surged abruptly, prompting the Pentagon to enter heightened readiness status. While Iraqi oil exports remain uninterrupted for now, insurance rates for shipping through the Strait of Hormuz have spiked 40% within a week. Iraq has explicitly warned that escalation could jeopardize its systemic export capacity—currently ~93 million barrels per month. More alarmingly, Iraq is negotiating with OPEC to raise its production ceiling to 5 million barrels per day. If implemented, such an increase would directly challenge OPEC+’s output-cutting agreement—but amid rising geopolitical tensions, it is more plausibly an emergency hedge against potential export disruptions, thereby reinforcing market perceptions of global oil-supply fragility. Brent crude has already breached $85 per barrel, up 12% since the start of the year. Rising energy prices not only directly inflate CPI-weighted components but also transmit broader inflationary pressures via elevated production costs. Against this backdrop, the 10-year Treasury—traditionally viewed as a safe-haven asset—has seen its yield rise partly due to portfolio reallocations away from “safe assets” toward “inflation-hedging assets” such as TIPS and commodities, generating a distinctive “reflationary safe-haven” premium.
Cascading Impacts on Global Asset Pricing: From Valuation Anchor to Systemic Stress
The rapid climb in long-end yields is triggering multi-dimensional shocks across financial markets. For U.S. equities, the 10-year yield serves as the key discount rate in discounted cash flow (DCF) models for growth stocks. Once this yield breaches 4.5%, the Nasdaq-100’s forward P/E ratio implies that long-term earnings growth assumptions must rise by at least 50 bps to sustain current valuations—a near-impossibility given slowing profit growth. Consequently, tech-stock volatility (as measured by the VIX) has jumped to 18.5, the highest level in three months. For emerging markets, capital outflows are intensifying: the J.P. Morgan EM Bond Index fell 2.3% last month—the largest drop since October 2023—prompting central banks in India and Indonesia to pre-emptively hike rates to defend their currencies. Domestically in the U.S., the 30-year mortgage rate has surged past 7.2%, the highest since 2000, contributing to four consecutive months of declining existing-home sales; corporate bond spreads have widened to 180 bps, while high-yield bond issuance volumes have dropped 35% month-on-month, effectively closing refinancing windows. The Bank for International Settlements (BIS) has issued a stark warning: “Should the 10-year Treasury yield settle above 4.6% in Q2, it will trigger an upgrade in the global assessment of debt vulnerability.”
Conclusion: “Permanently Higher” Interest-Rate Floor Now Being Priced In
The current strength in U.S. Treasury yields is not a cyclical correction—it represents markets’ deep adaptation to a “higher for longer” interest-rate environment. Sticky inflation, aggressive fiscal expansion, and persistent geopolitical risks constitute three rigid pillars supporting this new regime, transforming rate-cut expectations from a question of timing (“when?”) into a fundamental question of occurrence (“if?”). When Elon Musk insists he will “not sell any SpaceX shares,” it reflects private-sector confidence in long-term growth; when Vladimir Putin visits China while Iraq negotiates higher oil output, it highlights the ongoing restructuring of the global energy order; and when Samsung’s union resumes wage negotiations, it signals that labor-market bargaining power remains intact. All these threads point toward a shared conclusion: what we are experiencing is not the final, painful gasp of inflation—but rather a paradigm shift in macroeconomic governance in the post-pandemic era. A permanently higher neutral interest-rate floor has become the Damoclean sword hanging over global assets.