Rising Inflation Pushes US Treasury Yield Above 5%
US October consumer price index unexpectedly heated up, rising 0.4% month on month, with core CPI up 0.3% month on month, both above market expectations. In addition, Federal Reserve Governor Waller sent a hawkish signal that a 50-basis-point rate hike in December could not be ruled out, driving the US 10-year Treasury yield to briefly break above the 5% psychological mark intraday on the 10th, before easing back to around 4.990%. The 2-year US Treasury yield jumped more than 18 basis points to 4.738%, while the 30-year Treasury yield climbed to 5.352%.
Supply Pressure on Government Bonds Expected to Ease
UOB Asset Management Quantitative Investment Department Head and manager of three bond ETFs, the UOB Investment-Grade US Treasury 15Y+, UOB Select US Treasury 20Y and UOB Select US A Corporate 15Y, Guo Xiu-cheng pointed out that although net sovereign bond issuance by the G4 major economies in 2027 will remain high, compared with 2026, net supply to the public market from the US, eurozone and UK will be flat to slightly lower. According to Goldman Sachs analysis, the US Treasury continues to rely on short-term Treasury bills for funding and has expanded long-bond buybacks, which will effectively ease pressure on long-term Treasury supply. In addition, the US government is expected to hit the 41.1 trillion US dollar debt ceiling as early as February 2027, when the pace of issuance will be constrained, which may instead compress net US Treasury supply in stages.
Quality Premium Emerges, Bullish on Large Cloud Company Bonds
The credit bond market has seen a notable quality-premium rally. Guo Xiu-cheng noted that as AI capital expenditure is expected to climb to 1.66 trillion US dollars in 2027, AI-related corporate bonds have diverged. Since the end of September, four cloud giants — Microsoft, Meta, Oracle and Alphabet — have issued a combined 67 billion US dollars in new bonds, with Microsoft, Meta and Alphabet benefiting from strong balance sheets and cash flows, their credit spreads tightening rather than widening after pricing. Compared with volatile emerging cloud or data-center high-yield bonds, the risk-reward profile of highly rated hyperscale cloud company bonds continues to improve. Currently, effective yields on AAA- to A-rated corporate bonds have held firm in the 5.51% to 5.56% range, while BBB-rated investment-grade bonds have reached 5.95%.
High Coupons Offer Protection; Staged Buying Recommended
Guo Xiu-cheng believes that although rate-hike expectations may extend into early 2027, and the rate-path forecast has been slightly raised in response to October inflation data, incorporating a baseline scenario of a 25-basis-point hike in March next year, current high yield levels have fully priced in policy risks, providing thick coupon protection for medium- to long-term bonds. Nomura noted that US Treasury futures markets have quickly reflected hawkish expectations, with real yields at rarely seen highs in more than 10 years. Facing a volatile pattern with yields returning to 5%, investors need not panic-sell at lows, and can take advantage of yield spikes to buy in stages with a strategy emphasizing quality over quantity, prioritizing US Treasuries and investment-grade bonds of leading companies rated A or above to capture high-yield income and await a turning point in interest rates.