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Bond bears have pushed benchmark Treasury yields toward the closely-watched five per cent level ahead of U.S. inflation data that stands to determine expectations for a United States Federal Reserve interest-rate hike next week.

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The yield on 10-year notes has climbed almost 20 basis points this week to trade just below the psychologically-important level, which may attract dip buyers but also risks triggering further selling that could spill over into global markets. At around 4.94 per cent on Friday, the yield has reached its most elevated since 2023 — and is approaching its highest since 2007.

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The surge in yields comes as traders wrestle with rising oil prices and inflation that’s run above the Federal Reserve’s target for half a decade. A reading of the U.S. consumer price index Friday stands to be one of the most pivotal in years as traders price in a roughly 70 per cent chance of a rate increase at the Sept. 16 Fed meeting.

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“Hitting five per cent on the 10-year Treasury yield looks more like an inevitability here than a forecast,” said Padhraic Garvey, head of research for the Americas at ING Groep NV. “These are worrying times for bond markets.”

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Yields on the two-year, which are more sensitive to Fed rate moves, rose to as high as 4.59 per cent this week. Thirty-year yields hit their highest since 2007, luring standout demand at an auction of the securities.

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Camille de Courcel, head of developed markets rates strategy at BNP Paribas SA, says longer-dated U.S. yields can move further from current levels, particularly if investors start to doubt the central bank’s tenacity in taming inflation.

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“If for example the Fed were to be too slow or not reacting too much, then that would take over; you would have a repricing of inflation risk premia further out the curve,” she said in an interview with Bloomberg TV on Friday. “Everyone talks about higher term premium, but it’s not like it’s screamingly high.”

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Global pressure

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The moves have spilled over into bond markets worldwide, sending a gauge of global yields to its highest since 2007. Australian benchmark yields reached levels last seen in over a decade on Friday while Japanese equivalents traded close to the key psychological level of three per cent. New Zealand bonds fared particularly badly, with two-year yields climbing by 25 basis points.

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In Europe, which is sensitive to the energy shock given its reliance on imports, Germany’s 10-year yield touched the highest since 2009 on Thursday. Still, shorter-dated bonds won some respite Friday as oil and gas prices eased. The U.K. two-year yield outperformed, falling seven basis points to 4.80 per cent.

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“A lower U.S. CPI and a Fed hike are really the only circuit breakers I see at this point, otherwise I don’t think anyone is comfortable being long rates,” said Michael Tang, a rates strategist at Commonwealth Bank of Australia in Sydney. “It’s just massive hawkish sentiment taking over.”

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That leaves traders on edge going into Friday’s main economic event — especially as Fed officials have underscored their focus on inflation in recent weeks. To Molly Brooks, a U.S. rates strategist at TD Securities, a hotter-than-expected print stands to boost market expectations for a hike in September and additional tightening.