U.S. Treasury sell-off drives borrowing costs higher as forced selling intensifies

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U.S. Treasury sell-off drives costs higher

Highlights

The seven-session Treasury sell-off drives 10-year yields to their highest since June 2007 and 30-year yields to their highest since June 2002.
Personal consumption expenditure inflation held steady at 3.4 percent in August, below expectations, but failed to calm selling pressures in the Treasury market.
Large forced sales from hedge funds and REITs, combined with lack of bargain buying and leveraged fund rebalancing, amplify bond market volatility and rising yields.

Market pressure builds across Treasuries

As reported by Financial Times, U.S. government bonds are on course for their worst month in four years after a broad sell-off in Treasuries accelerates into what investors describe as a vicious loop. The seven-session losing streak pushes the 10-year Treasury yield to its highest level since June 2007, while 30-year yields trade at their highest since June 2002.

Investors and traders say the sell-off begins with concern over U.S. public debt and inflation, but technical pressures now amplify the move. Priya Misra, a portfolio manager at JPMorgan Asset Management, says rising yields are reaching levels that force some funds to sell Treasuries, adding further upward pressure on borrowing costs.

A report on Wednesday showing personal consumption expenditure inflation holding steady at 3.4 per cent in August, against expectations for a rise to 3.7 per cent, does little to calm the market. Treasury secretary Scott Bessent's August decision to expand his department's purchases of Treasuries also fails to stop the selling.

Forced sales add to broader market strain

Borrowing costs have been rising since the Iran war begins in February, as higher energy prices worsen inflation and weigh on bonds that pay fixed returns over long periods. Forecasts for strong U.S. economic growth, heavy borrowing by major AI companies and American public debt above $40tn also contribute to the rise in yields.

Matthew Scott, global head of trading at AllianceBernstein, says hedge funds and real estate investment trusts are among the large forced sellers of long-term Treasuries this week because they hold sizeable portfolios of mortgage-backed securities. As rates rise and U.S. homeowners become less willing to pre-pay mortgages, the life of those securities extends, prompting investors to sell other long-term debt such as Treasuries to rebalance risk.

Amrut Nashikkar, an analyst at Barclays, says similar pressures are appearing in other parts of the market, including portfolio rebalancing by leveraged funds with large Treasury futures positions. Daniel Gottlander, head of North America swaps trading at Citi, says the spillover across portfolios is happening at the same time, while the usual bargain buyers who might stabilise the market have not yet emerged.

Our earlier article on rising U.S. debt and stretched balance sheets explained how credit expansion across government, households and corporations has been supporting growth and asset prices, but also building medium-term risks. It highlighted heavy debt-funded AI investment and mounting fiscal pressures that could lift volatility and keep upward pressure on yields, arguing this backdrop makes longer-duration bonds more vulnerable while favoring short-dated Treasuries.

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