Bond bears have pushed benchmark Treasury yields toward the closely-watched 5% level ahead of US inflation data that stands to determine expectations for a Federal Reserve interest-rate hike next week.

The yield on 10-year notes has climbed almost 20 basis points this week to trade just below the psychologically-important level, which may attract dip buyers but also risks triggering further selling that could spill over into global markets. At around 4.94% on Friday, the yield has reached its most elevated since 2023 — and is approaching its highest since 2007.

The surge in yields comes as traders wrestle with rising oil prices and inflation that's run above the Federal Reserve's target for half a decade. A reading of the US consumer price index Friday stands to be one of the most pivotal in years as traders price in a roughly 70% chance of a rate increase at the Sept. 16 Fed meeting.

"Hitting 5% on the 10-year Treasury yield looks more like an inevitability here than a forecast," said Padhraic Garvey, head of research for the Americas at ING Groep NV. "These are worrying times for bond markets."

READ MORE: Wholesale rate sheets reprice higher on bond turmoil: what to do next

Yields on the two-year, which are more sensitive to Fed rate moves, rose to as high as 4.59% this week. Thirty-year yields hit their highest since 2007, luring standout demand at an auction of the securities. 

Camille de Courcel, head of developed markets rates strategy at BNP Paribas SA, says longer-dated US yields can move further from current levels, particularly if investors start to doubt the central bank's tenacity in taming inflation. 

"If for example the Fed were to be too slow or not reacting too much, then that would take over; you would have a repricing of inflation risk premia further out the curve," she said in an interview with Bloomberg TV on Friday. "Everyone talks about higher term premium, but it's not like it's screamingly high."

Global Pressure

The moves have spilled over into bond markets worldwide, sending a gauge of global yields to its highest since 2007. Australian benchmark yields reached levels last seen in over a decade on Friday while Japanese equivalents traded close to the key psychological level of 3%. New Zealand bonds fared particularly badly, with two-year yields climbing by 25 basis points. 

In Europe, which is sensitive to the energy shock given its reliance on imports, Germany's 10-year yield touched the highest since 2009 on Thursday. Still, shorter-dated bonds won some respite Friday as oil and gas prices eased. The UK two-year yield outperformed, falling seven basis points to 4.80%.

"A lower US CPI and a Fed hike are really the only circuit breakers I see at this point, otherwise I don't think anyone is comfortable being long rates," said Michael Tang, a rates strategist at Commonwealth Bank of Australia in Sydney. "It's just massive hawkish sentiment taking over."

That leaves traders on edge going into Friday's main economic event — especially as Fed officials have underscored their focus on inflation in recent weeks. To Molly Brooks, a US rates strategist at TD Securities, a hotter-than-expected print stands to boost market expectations for a hike in September and additional tightening. 

The core CPI, excluding food and energy, is expected to show a monthly increase of roughly 0.2% in August, according to a Bloomberg survey of economists. The report will come a day after a measure of producer price inflation showed renewed pressure from rising energy prices last month.

Breach of 5%

For the $32 trillion Treasuries market, a move through 5% in 10-year notes would represent a growing challenge for Treasury Secretary Scott Bessent, who has struggled to stymie a selloff in bonds ahead of midterm elections. On Thursday, his Treasury Department bought fewer bonds than expected during its first expanded buyback operation. 

Bessent sought to downplay concerns fueled by the latest selloff, saying the Treasury market is in "very good shape" while highlighting the strength of two auctions in recent days, and touting US outperformance versus its peers. A Bloomberg total return gauge of US Treasuries is down 1.4% this year versus a 1% decline in a broader global equivalent.

"Unconventional communication and actions from the US administration are rattling bond investors," said Andrew Ticehurst, a senior rates strategist at Nomura in Sydney. "The underlying backdrop was already fragile, due to high government debt burdens and high funding tasks."

Movements in yields impact the cost of capital for virtually everything and everyone. That includes US mortgage rates, a politically salient metric for US voters ahead of the midterm elections, which are already at their highest level in over a year. 

READ MORE: Fed's Barr noncommittal on September rate hike

As the global bond benchmark, Treasury yields are the reference price for debt markets across the world, which are also under pressure. A breach of 5% may be enough to trouble equity markets too.

The 5% level is "seen by some as a threshold above which financial markets might go into meltdown," said John Higgins, chief economic adviser for financial markets at Capital Economics. "While we aren't convinced that 5% is that 'magic' number, higher Treasury yields would certainly pose a risk to the sustainability of the US public finances as well as threaten equities."