The yield on the benchmark 10-year U.S. Treasury note has slipped back below 5%, easing pressure on borrowers from New York to Jakarta after a September selloff pushed long-term U.S. rates to their highest levels in about two decades. Investors now turn to the Federal Reserve, which announces its next policy decision on Wednesday, Oct. 28.

The 10-year yield was holding just under 5% on Monday, Oct. 26, after falling for three straight weeks, Trading Economics reported. On Sept. 28 it had climbed to about 5.2%, at the time its highest level since July 2007, and it was about 5.25% on Sept. 29, according to CNBC data cited by Wealth Professional.

The level matters in Asia because the 10-year Treasury is the reference point for pricing dollar debt sold by governments, banks and companies across the region, and for the yield gaps that steer money into or out of local bond markets.

A September to remember

September was one of the roughest months for Treasury holders in years. Two-year yields rose almost 60 basis points, the biggest monthly increase since early 2023, according to Reuters figures cited by Wealth Professional. The same report said the 10-year yield was on course for a gain of about 50 basis points, the largest since 2022, and that the ICE BofA MOVE index, which tracks expected swings in Treasury prices, rose nearly 30%.

The longest bonds took the hardest hit. The 30-year yield briefly topped 5.6% on Sept. 29, its highest since June 2002, the same report said.

Several forces combined. The Fed voted 12-0 in September to raise its main rate by a quarter point, Wealth Professional reported, and on Sept. 28 markets were pricing roughly two-in-three odds of another increase in October, Trading Economics said. A University of Michigan survey showed a sharp jump in consumers' inflation expectations.

Investors also fretted about U.S. budget deficits and the volume of Treasury debt coming to market, which pushed up the extra return they demand for holding long bonds, JoAnne Bianco of BondBloxx Investment Management told CNBC, as reported by Wealth Professional. Treasury Secretary Scott Bessent stepped up Treasury buybacks to restrain long-term yields, but the effort was widely seen as having little effect, according to Trading Economics.

“I do think we are moving towards a structurally higher-yield regime,” Charu Chanana of Saxo said, according to Reuters.

Why yields have eased

The retreat has been gradual. On Oct. 21, the 10-year yield was about 5.10%, the two-year about 4.78% and the 30-year about 5.41%, according to Briefs Finance, with tippinsights reporting similar levels. The next day it fell 17 basis points, the largest one-day drop in more than a year, and it hovered around 5% on Oct. 23, as softer U.S. economic data, a selloff in stocks and doubts about the payoff from heavy AI spending pushed investors toward government debt, Trading Economics reported.

The same move into safe assets has pulled down yields in Japan, where the 10-year government bond yield was around 2.79% on Oct. 27, near its lowest since early August, according to Trading Economics.

Energy prices remain the main threat to the rally. Brent crude traded above US$108 a barrel and West Texas Intermediate above US$97 on Oct. 21 after reports of missile strikes on vessels in the Strait of Hormuz and on Saudi energy sites, Briefs Finance reported. Brent peaked above US$117 in the week before Oct. 26 before easing, Trading Economics said.

For American households, relief has been modest so far. The average 30-year fixed mortgage rate fell to 7.41% from 7.5% in the week before Oct. 21, according to Mortgage Bankers Association data cited by Briefs Finance.

AI borrowing and the week ahead

A newer source of bond supply is corporate. Bond sales by the largest cloud and AI companies, known as hyperscalers, have more than doubled this year to over US$200 billion, LSEG data cited by Reuters showed.

Lotfi Karoui of PIMCO has argued that the evidence for this borrowing crowding Treasuries out of portfolios is weak, setting roughly US$1 trillion in expected hyperscaler capital spending against a Treasury market of about US$32 trillion, according to Wealth Professional. The same report cited an event study of six surprise hyperscaler deals that found no statistically significant move in 10-year yields, the term premium or swap spreads.

Dealmakers in Asia are adjusting to the new level of rates. Warburg Pincus Chief Executive Jeffrey Perlman told a conference in Singapore that deals can still work with the 10-year yield at 5%, Reuters reported.

The Fed's statement on Wednesday will be read closely for any signal on the path of rates after October. The reaction will feed directly into Asian bond markets, where India's 10-year yield sits near a three-year high while Japanese yields have been falling. Oil prices and the mood in technology stocks, both of which moved yields in October, remain the other variables to watch.