Bond bears are driving the US benchmark Treasury yield toward the closely watched 5% level, with upcoming inflation data set to shape market expectations for the Federal Reserve's rate decision next week. The US 10-year Treasury yield has climbed 18 basis points this week, settling just below a psychologically significant threshold that could either attract dip-buying or trigger further selling with global repercussions.

The yield stood at 4.96% on Friday, marking its highest level since 2023 and approaching peaks not seen since 2007. This surge comes as traders grapple with rising oil prices and inflation running above the Fed's five-year target. With markets pricing in roughly a 70% probability of a rate hike at the September 16 Fed meeting, Friday's US Consumer Price Index (CPI) release is poised to be among the most pivotal data points in years.

Padhraic Garvey, head of research for the Americas at ING, suggested that a move in the 10-year Treasury yield to 5% appears more like an inevitability than a forecast. For the bond market, these are troubling times. The 2-year Treasury yield, which is more sensitive to Fed rate moves, climbed to 4.59% earlier this week, while the 30-year yield also touched levels not seen since 2007.

These fluctuations have rippled across global bond markets, with Australia's benchmark yield hitting its highest level since 2011 on Friday and Japan's 10-year yield approaching the key psychological threshold of 3%. A global yield index now sits at its highest point since 2007.

Michael Tang, a rate strategist at Commonwealth Bank of Australia in Sydney, noted that only a decline in CPI and a subsequent Fed rate hike would serve as a true circuit breaker, as no one feels comfortable buying bonds otherwise. Molly Brooks, US rate strategist at TD Securities, added that a stronger-than-expected CPI could heighten expectations for both a September rate hike and further monetary tightening ahead.