U.S. debt demand weakens as one shock after another stokes fear that high inflation is here to stay

Key Points:

• Oil prices surged following the U.S.-China summit, as there were no indications that China would pressure Iran to reopen the Strait of Hormuz, a key oil transit route.
• Recent U.S. Treasury auctions revealed weak demand for longer-term bonds, with the 30-year bond yield hitting 5% for the first time since 2007, reflecting investor concerns amid hotter-than-expected inflation data.
• Rising Treasury yields increase government interest costs, worsening the budget deficit and debt burden, while the Treasury expects to borrow more this quarter due to softer-than-anticipated cash inflows.
• Federal Reserve officials expressed reduced tolerance for persistent inflation driven by repeated supply shocks, indicating potential policy tightening to achieve a durable return to the 2% inflation target.
• Despite Treasury Secretary Scott Bessent's optimism that the current energy shock is temporary, bond investors remain cautious, pushing yields higher and causing stock market declines amid fears of sustained inflation and higher interest rates.