Safe haven halo fails? US Treasury sell-off returns, Wall Street just breathed a sigh of relief and is startled again

According to Zhitong Finance APP, just as global bond investors began to believe that the worst phase of this year's sell-off was over, the sharp rise in U.S. Treasury yields has forced them to reassess this judgment.

Multiple factors driving turbulence in the world's largest bond market show little sign of abating: stubborn inflation and hawkish statements from the Federal Reserve are preparing traders for more aggressive rate hikes, while the steadily increasing supply of debt further intensifies upward pressure on yields. Even as the turmoil triggered by Nvidia (NVDA.US) rocked equities and risk sentiment, the bond market sell-off has not stopped, undermining expectations that U.S. Treasuries would quickly regain their traditional safe-haven status.

"The current environment is even more challenging than during the pandemic or the global financial crisis," said Kellie Wood, a fund manager at Schroders based in Sydney, who is currently shorting U.S. Treasuries. "Those previous times saw one-way big moves; now we are facing successive supply shocks and sharp swings in interest rates. We must prepare for further upward pressure on yields before the end of the year."

This week, U.S. Treasuries suffered a heavy blow, and the pressure was not limited to short-term bonds highly sensitive to policy. The combined gains in the two-year U.S. Treasury yield on Tuesday and Thursday (with the spot market closed on Wednesday) were the biggest since March 2023, while the rise in ten-year yields was the largest since April 2025. As of Friday's Asian trading session, the two-year yield stood at 4.86%, and the ten-year at 5.12%.

This marks a sharp reversal from just a week ago — at that time, Democrats scored a sweeping victory in the U.S. midterm elections and concerns about artificial intelligence (AI) drove investors to flock to U.S. Treasuries for safety. Since then, this bullish rush has completely reversed, triggered by Federal Reserve Governor Christopher Waller's support for rate hikes and his statement that he would favor a 50 basis point increase should inflation continue to accelerate. A stronger-than-expected consumer price report reinforced this shift, as did remarks from Dallas Fed President Lorie Logan.

As the global benchmark for financing costs, the current pressure on U.S. Treasuries is being transmitted to markets worldwide. A key measure of U.S. Treasury returns slid once again after the latest surge in yields, reversing the prior recovery that had narrowed this year's losses to just 1%.

"The sell-off in developed market sovereign bonds is far from over," said Tracy Chen, portfolio manager at Brandywine Global Investment Management, adding that the main driving forces remain strong. "The next target for the ten-year yield should be 5.5%, after which further consolidation is likely."

According to strategist Alyce Andres, "With new inflation data due on Friday, there's still room for the two-year U.S. Treasury sell-off to continue."

However, for some investors, rising yields are creating opportunities. George Boubouras of hedge fund K2 Asset Management believes that ten-year U.S. Treasuries are attractive near 5.3%, adding that the recent rebound is not a false start.

"We will buy at 5.3% and continue to buy until it leaps to a new level," said Boubouras, who is based in Melbourne and is the firm's Managing Director and Head of Research, Investments & Consulting.

Interest Rate Pricing Expectations

Outside the United States, yields in Japan and Australia are returning to multi-year highs. France's yields have surged sharply due to market concerns over its fiscal outlook and political instability, and after a decline earlier in November, have resumed their ascent.

Traders are ramping up bets on global policy tightening. According to compiled data, the swap market is now pricing in an average policy rate move of more than 50 basis points for eight economies over the coming year, up from 33 basis points on November 6, the lowest since June.

"Unless risk assets (such as stocks) suffer a severe crash or oil prices fall back to pre-war levels, major central banks are likely to hike rates more than the market currently expects," wrote Steven Barrow, Head of G10 Strategy at Standard Chartered Bank in London, in a report.

Schroders' Wood sees a more divergent picture. Although with accelerating inflation and growth outpacing the rest of the world, U.S. rates may need to rise — possibly above 5% — she is going long Australian and European bonds, betting that local central banks will ease policy in 2027 to avoid recession.

"2027 will be a year of divergence, with economies at different points in the cycle," she said. "For active fixed income managers, 2027 will be full of opportunity."