Global long-term bond yields rise, U.S. Treasury yields hit a two-month high

Global long-term bonds are facing a new wave of selling, with the yield on the U.S. 10-year Treasury rising to 4.17% on Tuesday and the 30-year yield approaching 4.82%, both hitting new highs since September. Meanwhile, long-term bond yields in countries such as Japan, Australia, and Canada have significantly increased since November, with investors demanding higher risk premiums. On Tuesday, market focus shifted to this week's Federal Reserve interest rate decision, with traders estimating a roughly 90% probability of a 25 basis point rate cut on Wednesday. However, analysts believe the decision will come with a hawkish tone, suggesting a potential extension of the pause on rate cuts into next year. The terminal rate indicated by the swap market has jumped from below 3% to 3.2%, the highest level since July. Policy uncertainty is driving long-term yields upward. The New York Fed's term premium model shows that this indicator has rebounded to about 0.7%, comparable to early September levels. Concerns are rising in the market about the Fed potentially underestimating inflation risks, especially with Trump set to nominate a successor to Chairman Powell, whose term ends next year. Globally, concerns about fiscal sustainability and inflation pressures are leading markets to bet that multiple countries will resume rate hikes in 2026. The yield on Japan's 30-year government bonds has risen by 34 basis points to 3.39% since November, leading the global long-bond sell-off. Rate Cut Expectations Accompanied by Hawkish Shift The Federal Reserve's two-day policy meeting will conclude on Wednesday afternoon with the announcement of its decision. Although the market is highly confident that a 25 basis point cut to the 3.5%-3.75% range will occur this week, investors are more focused on the signals regarding the 2026 policy path released by officials through the dot plot. John Canavan, chief analyst at Oxford Economics, expects that the Fed's rate cut this week will come with a hawkish tone and a potential extension of the pause next year. He pointed out that if the Fed strongly hints at a readiness to extend the pause, it could disappoint investors, as the market currently prices in a probability of over 90% for another rate cut before April next year. Roger Hallam, global rates head at Vanguard, believes the Fed will cut rates and characterize this cut as part of ongoing risk management. He anticipates that the terminal rate for the Fed's cessation of easing will be closer to 3.5% rather than 3%, as the macro environment next year is expected to be growth-oriented, while inflation remains above target. According to Bloomberg strategist Edward Harrison, as global yields rise, Fed officials may feel the need to adopt a hawkish dot plot outlook, surprising the market and pushing yields higher. With the Fed's leadership transition and midterm elections approaching in June next year, long-term rates still face upward risks from fiscal spending and concerns about Fed independence, making it likely that the yield curve will continue to steepen. U.S. Treasury Yield Curve Rises Across the Board On Monday, the U.S. Treasury yield curve rose across the board by 2 to 3 basis points, with mid-term bonds performing the weakest. The market narrowed its losses ahead of a $58 billion three-year Treasury auction at 1 PM Eastern Time, with auction results showing yields below forecasts and demand better than expected. Auctions for $39 billion in 10-year and $22 billion in 30-year Treasuries are scheduled for Tuesday and Thursday, respectively The Ministry of Finance has adjusted this week's auction schedule to align with the Federal Reserve's two-day meeting. The yield on the 10-year Treasury bond has been suppressed at the 4.2% level since September, which directly affects mortgage and corporate borrowing costs. Bob Elliott, Chief Investment Officer of Unlimited, wrote in a report that the yields on the 2-year, 10-year, and 30-year bonds have essentially returned to the levels expected by the Federal Reserve when it paused interest rate cuts. As a result, these elevated expectations of easing have produced a counterintuitive outcome—higher easing expectations have pushed yields up rather than down. Global Long Bond Sell-off Intensifies Recently, the global long-term bond market has once again faced fierce selling, with rising concerns about fiscal sustainability in various countries and inflation pressures leading the market to bet that multiple countries will resume interest rate hikes in 2026. Japan is at the eye of this global long bond sell-off. Under the pressure of yen depreciation and inflation, the Bank of Japan is expected to raise interest rates by 25 basis points next week. The yield on Japan's 30-year government bonds has risen by 34 basis points to 3.39% since November, leading among major countries. Australia's inflation unexpectedly rose to 3.8% in October, with pricing for interest rate hikes next year reaching 34 basis points. The market is focused on the Reserve Bank of Australia's meeting on December 9, which may release a hawkish tone. The yield on Australia's 30-year government bonds rose by 30 basis points to 5.23%. Following the unexpectedly strong employment data released last Friday in Canada—54,000 new jobs added in November, and the unemployment rate dropping by 0.4% to 6.5%—there has also been a 25 basis point rate hike expectation for 2026. The yield on Canada's 30-year government bonds rose by 28 basis points to 3.85%. The yields on Germany's and China's 30-year government bonds rose by 24 basis points to 3.45% and 11 basis points to 2.25%, respectively, during the same period