The US 10-year Treasury yield surpassed 5% for the first time since 2023 on Monday, as mounting inflation angst collided with swelling government and corporate borrowing needs.
The yield, a benchmark for US mortgage loans and bonds globally, rose almost 5 basis points to as high as 5.01%, before paring much of the increase as buyers emerged.
"The 5% mark in 10-year rates is clearly a key psychological level for investors — a point at which some may have earmarked for buying a dip," said Molly Brooks, US rates strategist at TD Securities.
The initial jump came after surging crude prices raised concern about inflationary pressures in the countdown to this week's Federal Reserve decision. The tenor's yield last breached the 5% level in October 2023, and only for one day.
Bond prices fell globally on Monday, with UK and German debt sliding as Brent crude approached $110 a barrel. With the rise in energy prices showing little sign of easing, investors are watching whether 5% will again prove a line in the sand for 10-year Treasuries, as happened three years ago.
While the yield pulled back to around 4.99% as of about 4:10 p.m. in New York, sentiment remains fragile. At one point, BlackRock Inc.'s iShares 20+ Year Treasury Bond ETF, the largest fund focused on long-duration US Treasuries, touched its lowest intraday level since its 2002 launch.
The rise in the US 10-year yield threatens to slow economic growth and weigh on equities that are trading at lofty valuations. This has prompted Treasury Secretary Scott Bessent, who has made long-term borrowing costs a key measure of the administration's success, to boost bond buybacks, encourage Japan to curb Treasury sales and open the door to potentially cutting long-maturity debt issuance.
Little Effect
None of it has had much effect. In fact, the selloff has only been quickening of late, with 10-year yields heading for their seventh month of increases, matching the longest monthly climb since 2011.
Less than two months before the US midterm elections, the 10-year yield is now roughly a full percentage point above its level before the outbreak of the Iran war. The conflict has sparked a surge in oil prices, adding to inflation worries. Those concerns were reinforced by
But the selloff also reflects deeper structural forces that have pushed up long-dated yields
"There are a lot of underlying factors that make for a sustained selloff in rates as the path of least resistance for now," said Zach Griffiths, head of investment-grade and macro strategy at research firm CreditSights. Ten-year yields could rise toward 5.5%, he said.
The Treasury market has ballooned to about $32 trillion from around $4.5 trillion since 2007, pushing the federal debt to more than 100% of US gross domestic product. Fitch Ratings warned in August that the country is "vulnerable to future economic shocks" as debt levels grow.
'Persistent Pressure'
The last time the 10-year yield topped 5%, in October 2023, it closed below the milestone that day. Buyers quickly pounced then as the US labor market cooled and inflation eased, allowing the Fed to end its most aggressive tightening campaign in decades. By September 2024, the Fed began to cut rates.
This time, a resilient labor market has kept investors focused squarely on inflation and the prospect that borrowing costs will remain higher for longer. Treasuries are now on course for their first annual loss since 2022.
It's "very hard for the market to be bullish duration given the persistent pressure from the energy complex and the fact that yields have been grinding higher for months," said Izaac Brook, rates strategist at RBC Capital Markets. "I do think the 5% level will bring buyers in — you can see a bit of a bounce right now. But the rates market is still at the mercy of what's happening in the Middle East."
So far, the bond selloff has remained largely orderly, with volatility well contained. A sizeable short rates volatility position is emerging in the Secured Overnight Financing Rate options market, where a trader or several traders spent more than $100 million in premium to bet that interest-rate swings will decline.
But Bessent has made clear his unease with the relentless rise in long-term borrowing costs. The former hedge fund manager has taken several unconventional and sometimes controversial steps aimed at bringing down yields, including opening the door,
In August, Bessent surprised markets by announcing plans to supersize the buybacks of longer-dated debt, from the originally scheduled $2 billion cap. But his subsequent unveiling of a plan to buy as much as $6 billion of longer-maturity securities in September was deemed still insufficient to have a lasting impact. Bessent has framed his goal as to slow moves, instead of altering the "equilibrium" of bond prices.
Wednesday Focus
The surge in yields raises the stake for the Fed's Wednesday policy announcement. Interest-rate swaps show that traders see a greater than 90% chance that Fed Chairman Kevin Warsh and his colleagues raise borrowing costs this week, which would be the central bank's first hike since 2023.
"If they don't hike, it's going to be pandemonium," said Ed Al-Hussainy, a portfolio manager at Columbia Threadneedle. In that scenario, long-term bond yields will surge as inflation risks mount, he said.
For his part, he said he's looking to buy around these levels.
"We are looking for opportunities to add, but it's not going to be today," he said. "It takes some time and confidence."
