Global sovereign bond markets suffered a sharp sell-off in September, with the US 10-year Treasury yield currently holding near 5.23%, close to its highest level since July 2007.

Based on current levels, the 10-year US Treasury yield has climbed nearly 50 basis points in September, on track for its largest monthly increase in about two years.

This bond market decline is not limited to the United States. European and Japanese government bond yields have also risen significantly, reflecting that markets are repricing the interest rate paths of major central banks. Persistently elevated energy prices, increased government bond issuance, and central banks' continued signals of "higher rates for longer" are together putting pressure on long-duration bonds.

Shorter-Term Yields Rise More Sharply as Rate Hike Expectations Reintensify

Compared with the long end, shorter-dated government bonds, which are more sensitive to policy, have seen more pronounced selling. The US 2-year Treasury yield previously rose to around 4.96%, the highest level since 2024, with a cumulative increase of more than 50 basis points in September.

Behind this is the market's renewed increase in bets that the Federal Reserve will continue raising rates in October. Money markets have now priced in close to a 70% probability that the Fed will raise rates by 25 basis points next month.

This means the current pressure on the bond market stems not only from long-term inflation and bond supply, but also from the market revising up its expectations for the terminal policy rate.

European and Japanese Bond Markets Under Pressure in Tandem

European government bonds have also experienced significant selling. Benchmark yields in Germany and France previously rose to 17-year and 18-year highs respectively, before stabilizing somewhat in early trading on Wednesday.

In Asia, Japan's 10-year government bond yield also remains elevated. Its cumulative increase this quarter has exceeded 40 basis points, with the market continuously testing the Bank of Japan's tolerance for yield levels.

From a global perspective, this bond market adjustment has evolved into a cross-market repricing of interest rates, rather than isolated volatility in a single country.

High Energy Prices Continue to Weigh on Bonds

Persistently high energy prices are one of the important drivers of the recent bond sell-off. Crude oil prices remain elevated, increasing market concerns about a resurgence in inflation.

As long as energy costs remain strong, it will be harder for major central banks to quickly shift toward easing policy, and investors will demand higher bond yields to compensate for inflation risk.

At the same time, the United States continues to increase Treasury issuance, further adding to supply pressure in the bond market. The combination of these two factors has made long-duration government bonds one of the most affected assets this month.

US PCE Becomes the Next Key Variable

Next, the market's greatest focus is the US August Personal Consumption Expenditures price index, namely the PCE data. The market has already significantly increased its bets on another Fed rate hike, so if PCE data comes in above expectations, it could further reinforce the "higher for longer" trade and trigger a new round of long-end Treasury selling.

Conversely, if inflation data comes in significantly below expectations, it could ease market concerns about an October rate hike and give the bond market some short-term breathing room.

Therefore, the core logic of the global bond market in September is already very clear: elevated energy prices, increased bond supply, and hawkish central bank expectations are together driving a rapid rise in yields, and whether the next phase of the rally can continue depends largely on whether inflation data continues to support higher policy rates.