The "US debt volcano" continues to erupt, and there is still a big risk approaching this week

On Wednesday, Treasury yields continued to climb, with the base rate across the curve rising by 6 to 10 basis points.The 10-year Treasury yield rose 10 basis points to 4.64 percent, the highest since October 2007.The rebound in U.S. crude oil futures is believed to have exacerbated inflationary pressures, while bearish sentiment that the Federal Reserve needs to keep interest rates high for longer has also fueled a broad market correction.The ICE BofA MOVE index, which tracks expected volatility in bonds, hit its highest level in a month this week.

According to researchers at Bank of America,Whether the 10-year Treasury yield can reach 5% depends on whether investors believe the economy will continue to strengthen and the Federal Reserve will keep interest rates high for longer.The bank's Bruno Braizinha wrote in a note on Wednesday that 10-year Treasury yields were on the verge of returning to "pre-global financial crisis levels," where they were between 2004 and 2006.

Reaching 5 per cent for the base rate, which determines the cost of fixed-rate residential mortgages and corporate borrowing in the US, "may require not only further improvement in fundamentals (a soft landing remains our baseline), but also greater confidence in the outlook", Braizinha said. "This will further raise expectations of an increase in the Fed's neutral policy rate, which also creates the possibility of a steepening of the curve and the 10-year Treasury yield approaching 5 per cent."

This week, a key measure of the profitability of long-term bond investors turned positive for the first time since June 2021. The New York Fed's 10-year term premium gauge, which measures how far Treasury yields have moved beyond the expected path of short-term interest rates, has recovered from an August low of -0.6 per cent as Treasury sales grew faster than expected and the Fed said policy rates would remain high in 2024.

"The Fed is usually the main driver of the term premium throughout the cycle", says Mr. Braizinha. "All else being equal, higher levels of supply should lead to higher term premiums".

Between 2004 and 2006, the difference between the term premium on the two-year and 10-year Treasury yields averaged about 40 basis points. At present, the spread is flat, and a return to the 40 basis point area would put the 10-year Treasury yield "close to 5% under current circumstances".

Industrial foreign exchange"While the 10-year Treasury yield is closer to our baseline at around 4 per cent, they continue to recommend hedging in the event of higher yields," he said.

Bob Michele, fixed income chief information officer at JPMorgan Asset Management, said: "We are at an inflection point for the economy and the bond markets. The last 15 years have not been normal, we reached structural lows and now we are going back to more normal."

Marko Kolanovic, chief market strategist at JPMorgan Chase, warned on Wednesday that there could be more volatility ahead, calling the decline in Wall Street's fear index (VIX) this summer a "technical aberration."

Later this week,Traders will be closely watching comments from Federal Reserve Chairperson Jerome Powell and a number of other central bankers, as will the Fed's preferred inflation gauge, the personal consumption expenditure price index, on Friday.The potential shutdown of the U.S. government, or the loss or postponement of up to $1.90 billion a day in revenue as a result, and the auto worker strike have worried traders who are looking for signs that Fed officials may soften their hawkish message.

Krishna Guha, vice-chairperson of Evercore ISI, said investors were looking ahead to the upcoming event as an opportunity for the Fed's leadership to change its tune in hopes of tapering the tightening of financial conditions. "But we don't think any prospect of an early turn is realistic in the event of a further surge in yields" and the Fed's message is likely to moderate but unlikely to change course.

"Appetite" for the dollar continued to climb, with a measure of the greenback's strength rising for a sixth day in a row, setting a record for the longest streak in a year. It is worth noting that the large number of options positions held by the JPMorgan Chase & Co stock fund is likely to fuel the US stock sell-off later this week, as tens of thousands of protective put contracts expire on Friday, and the call-over price is not far from the current level of the S & P 500 index.