10-Year U.S. Treasury Yield Exceeds 5%; Market Debates Between 2023-Style Peak and 2000s-Style Crisis

Original author: Zhao Ying

Source: Wall Street Journal

The U.S. 10-year Treasury yield, which serves as a benchmark for trillions of dollars in global assets, surged to 5% amid tensions over Iran, widely regarded as a concerning threshold. Aside from a brief spike to 5% in 2023, the last time the 10-year yield hovered above 5% was just before the global financial crisis.

Overnight, the 10-year U.S. Treasury yield rose intraday to as high as 5.012%, the highest intraday level since 2007, before retreating to close at 4.960%. Breaking through this key threshold is forcing investors to confront a central question: Is the bond market entering an entirely new era?

There are currently two opposing narratives in the market. One argues that 5% will serve as a temporary peak, as it did in October 2023, after which yields will decline again; the other fears that yields will decisively break through this threshold, replicating the prolonged high-yield environment seen in the 2000s or even the 1990s. The outcome will have profound implications for borrowing costs faced by consumers, businesses, and even the U.S. government, and could influence the trajectory of the upcoming midterm elections.

The immediate trigger for this round of yield increases was the surge in energy prices driven by escalating tensions in the Middle East. Brent crude rose nearly 9% last week, following Houthi militants, backed by Iran, effectively controlling another critical shipping chokepoint along Yemen’s western coast. As of Monday, Brent crude edged up 1% to $105.68 per barrel.

Rising energy prices have reinforced market expectations of persistently high inflation. The stronger-than-expected inflation data released on Friday led investors to nearly unanimously anticipate that the Federal Reserve will raise interest rates at its meeting this Wednesday and continue tightening monetary policy afterward. While Trump has repeatedly publicly called for the Fed to cut rates, placing Fed Chair Walsh in a difficult position, market expectations for rate hikes continue to rise.

The 10-year U.S. Treasury yield is a key driver of interest rates in the economy, and its recent rise has pushed mortgage rates back up to nearly 7%. Treasury Secretary Scott Bessent previously took unconventional measures to suppress the yield, but so far with limited success.

The intraday movement on Monday reminded some investors of October 23, 2023, when the 10-year yield similarly touched 5% in early trading before sharply retracing to above 4.8% later that day, demonstrating the classic behavior of investors rushing to buy bonds after the milestone was reached.

However, this pullback was significantly less pronounced than in 2023, leading many investors to believe that yields could easily surpass 5% in the coming weeks or even months.

Greg Peters, Co-Chief Investment Officer at PGIM Credit, said: "I've been asking myself, 'Alright, what could be a catalyst for lower rates?' It's hard to find an answer other than a recession. Current conditions are very favorable for yields to remain high or even rise further."

On the other hand, Meghan Swiber, Senior U.S. Interest Rate Strategist at Bank of America, holds a different view: "If the Fed raises rates this week and signals that it is willing to do whatever it takes to control inflation, we believe this would actually help lower long-term rates."

Some investors believe that this round of yield increases reflects, to some extent, the normalization of the economy—returning to the state before the 2008 financial crisis and the era of central bank bond-buying and ultra-low interest rates.

However, the current situation also has its unique aspects. The total U.S. federal debt has recently surpassed $40 trillion, doubling over the past decade. The growing debt size means an increased supply of government bonds, potentially putting downward pressure on bond prices and pushing yields higher. Under Bassent’s leadership, the Treasury has recently begun increasing its repurchase activity of long-term bonds, but these purchases remain negligible relative to the total outstanding stock of government debt.

Representative David Schweikert (R-AZ) wrote on social media Monday: "Today's numbers should terrify Congress."

Several analysts have noted that the stock market rally driven by AI investment enthusiasm has, to some extent, mitigated the economic impact of high yields.

Eric Winograd, Chief Economist at AllianceBernstein, said: "Typically, higher yields and borrowing costs might dampen corporate investment. But many tech companies now view AI investment as a strategic imperative for survival. I think their response to financial conditions is vastly different from that of other businesses."

This factor has led to relatively optimistic market sentiment regarding the economy’s ability to withstand a 5% yield without rapidly slowing down, and has provided further support to the narrative that yields will remain high for an extended period.