The world's largest bond fund, Pimco, has warned that the yield on U.S. 10-year Treasury bonds risks breaking through 6%, which would be the first time this metric reaches this level in 26 years.
Pimco’s Chief Investment Officer, Dan Ivascyn, told the Financial Times that a further significant rise in the 10-year U.S. Treasury yield from its current level of 5.29% is “achievable.” He noted that technical selling pressure, driven by forced liquidations from leveraged investors such as hedge funds that have sustained ongoing losses in the $32 trillion market over the past several weeks, is one of the key factors pushing yields higher. Ivascyn also warned that if the 10-year U.S. Treasury yield rises to 5.5% or higher, risk assets such as equities and credit bonds could experience “a quite noticeable decline.”
This round of rising yields has begun to impact the real economy. Data shows that, as of the week ending October 8, the average U.S. 30-year fixed mortgage rate rose to 7.4%, up 12 basis points from the previous week, reaching the highest level since 2023 and further pressuring American households just weeks before the crucial midterm elections.
Stop-loss selling creates a negative feedback loop.
Ivascyn’s warning echoes the widespread concerns among investors in recent markets. Several investors had previously raised alerts, suggesting that the U.S. Treasury market is caught in a "vicious cycle"—ongoing selling pressure drives yields to new highs, compelling additional market participants, such as real estate investment trusts, to follow suit and sell bonds, further intensifying the selling pressure.
Ivascyn explicitly stated that a significant portion of recent market activity is directly linked to "negative technical factors" and "stop-loss executions by platform-based hedge funds and other leveraged investors." He noted that, from a short-term trading perspective, yields breaking through 6% are "certainly possible."
The yield on the U.S. 10-year Treasury note has reached its highest level since the early 2000s, driven by inflation concerns stemming from Trump’s potential war with Iran, a surge in large-scale borrowing by AI companies, and market expectations of strong U.S. economic growth. Inflationary conditions are particularly unfavorable for bonds, as they offer investors a fixed stream of returns.
Risk assets are under pressure, with concerns emerging in the private market.
Ivascyn warned that further rises in U.S. Treasury yields could pressure risk assets. Although U.S. stock indices remain near historical highs, the negative impact of high yields on certain companies is becoming evident—this month, borrowing costs for bonds issued by the lowest-rated companies rose to 17%, the highest level since May 2020, driven by both rising Treasury yields and investors demanding higher risk premiums.
Outside the public markets, Ivascyn anticipates that higher U.S. Treasury yields will trigger issues in the private markets “in slow motion,” with commercial real estate being especially vulnerable, as he notes the sector has “significant capital structures that remain fragile and weak fundamentals.”
High yields or self-correction: Opportunities emerge in overseas bond markets
However, Ivascyn also pointed out inherent constraints on rising yields. He believes that as yields continue to climb, investors will gradually shift more assets into U.S. Treasuries to lock in higher returns, which will become a "limiting factor" for further yield increases. Strong demand at this week’s auctions for both 10-year and 30-year U.S. Treasuries has already shown early signs of this trend.
Regarding overseas markets, Ivascyn believes there are more attractive alternatives. He stated that Pimco is “not as concerned as some others about the U.S. ability to sustain current deficit levels,” but emphasized that “there’s no need to hold only U.S. bonds.” He highlighted the investment value of Australia’s “high-quality credit” bonds and noted that, despite the UK facing “its own challenges,” its bond yields remain higher than those in the U.S. Markets in Canada and Germany—particularly when denominated in U.S. dollars—also offer “very attractive yields and stronger initial fiscal positions.”
Article by Zhang Yaqi, Wall Street Journal