Long-dated US Treasuries are exhibiting fragility ahead of this week's Federal Reserve rate decision, with the 10-year term premium now below its level at the start of the year.

Oil prices are playing a decisive role in shaping Treasury yield movements in the near term. However, concerning fiscal deficits and intensifying competition for capital suggest any rebound in long-dated bonds will prove short-lived.

The market has effectively backed the Fed into a corner regarding this week's hike, with probabilities for a raise at Wednesday's policy meeting surging above 90%. Consequently, the focus of market discussion has shifted from whether the Fed will hike to how long the tightening cycle will persist, with pricing leaning toward at least one additional rate increase before year-end.

Accelerating inflation driven by higher energy prices, combined with massive Treasury supply, indicates that bonds across all maturities are unlikely to find respite in the short term. In fact, the 10-year yield has just touched its highest level since 2007.

From the corporate perspective, even if the pace of AI development decelerates, equities would suffer the impact far earlier than Treasuries would see any uplift. As hyperscale data center operators increasingly tap debt markets to finance AI infrastructure, and with long-term supply agreements preventing rapid investment pullbacks, substantial bond issuance will sustain capital tightness.

Absent a clear catalyst driving sustained declines in oil prices, expanding fiscal deficits and continued corporate borrowing will create room for upward reassessment of the term premium, locking the 10-year Treasury yield more firmly above the 5.0% threshold.