The US 10-year Treasury yield has surged to its highest point in nearly two decades, marking the latest milestone in a brutal global bond market selloff. Surging energy prices, rising debt supply, and elevated inflation pressures have combined to fuel this decline.

The global bond benchmark's yield rose as much as 4 basis points to 5.02% on Tuesday, breaking through its 2023 peak and reaching levels not seen since 2007. The latest leg of the yield surge is being driven by further gains in global oil prices as risks to Middle Eastern energy supplies intensify.

Against the backdrop of sharply falling bond prices, the Federal Reserve is set to announce its interest rate decision on Wednesday, with investors anticipating that officials will raise short-term borrowing costs for the first time since July 2023. If the Fed opts against a hike, or if Chairman Kevin Warsh signals less monetary tightening than markets expect in the coming months, bond investors may demand higher yields to compensate for inflation risk.

According to Vail Hartman, a strategist at BMO Capital Markets, if the Fed holds rates steady this week, it becomes difficult to avoid damaging its credibility in the fight against inflation. Beyond the scenario of the Fed unexpectedly holding firm, a modest rate increase would suggest, whether through the dot plot or the press conference, that the central bank is adopting a more patient stance, leaving markets vulnerable to shocks in either case.

Global bond yields have been climbing steadily since the US launched military action against Iran in late February, which disrupted oil and gas supplies across the Middle East. Additional factors are also contributing to the pressure, including heavy corporate borrowing to fund AI-related expenditures, which is flooding the market with new bond issuance and weighing on supply dynamics while further stimulating an already resilient US economy.

Meanwhile, governments around the world are issuing ever-larger amounts of debt, both to refinance maturing bonds and to fund fiscal deficits. As central banks step back from large-scale government bond purchases via quantitative easing programs, and demand from other traditional buyers cools, governments are becoming increasingly reliant on price-sensitive investors.

Phoebe White, head of US rates strategy at UBS, noted via email that with no signs of real economic weakness and the supply/demand dynamics of the Treasury market vastly different from those in 2007, the scope for long-term yields to decline is somewhat limited. Structural demand for US Treasuries has weakened considerably, particularly from foreign official investors.