US Treasury yields hit two-decade highs, marking worst quarter since 1994

US Treasury yields surged to two-decade highs on Thursday, marking the sharpest quarterly increase since 1994 as bond markets reeled from rising interest rates. The benchmark 10-year Treasury yield rose 87.1 basis points in the September quarter, reaching 5.31% on Thursday, its highest level since 2007. The 30-year Treasury yield also hit a multi-decade high, topping 5.65%.

Globally, sovereign yields have climbed, with Japan experiencing an unprecedented fifth consecutive quarter of double-digit gains. This surge is driven by soaring energy costs fueling inflation and robust demand in sectors like AI and data centers, which are lifting expectations for economic growth and future short-term interest rates.

Higher interest rates increase financing costs for businesses and individuals and raise government debt servicing expenses. Traders have revised their expectations, now anticipating at least three more rate hikes from the Federal Reserve before mid-2027, reversing earlier expectations of rate cuts.

Andrew Lilley, chief rates strategist at Barrenjoey, commented that the Treasury bear market was necessary to address persistently high core inflation. He believes the end of this trend is in sight but cautioned that higher bond returns could pressure other markets. European bond futures and cash bond markets in Australia, South Korea, and Japan traded under pressure on Thursday.