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The benchmark 10-year Treasury yield is below the level that caused a massive crash last fall.
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Still, persistent inflation and weak government bond auctions could push yields above 5 percent.
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Once this threshold is crossed, investors could be in for a sharp correction in stocks.
Treasuries may not be the busiest trade, but if yields don’t rise too far above current levels, things could get anything but boring at some point.
While this year’s equity momentum has distracted Wall Street, the benchmark 10-year Treasury rate has risen as much as 83 basis points since 2023.
In April the value was as high as 4.7%, not far from the threshold that caused the markets to collapse last fall: 5%. When that 16-year high was broken in October, it triggered one of the worst market crashes in history. While U.S. Treasury bonds fell on Friday following a mediocre jobs report, markets are still cautious for further upside given ongoing inflation and overall economic strength.
Could there be a repeat of the 5% return? For analysts, it all depends on fiscal policy and inflation.
Where the returns go
“Bond King” Bill Gross urges caution and tells investors that high government debt will push yields to 5% within the next 12 months.
Yields move in the opposite direction to bond prices, meaning weak demand is driving interest rates higher. For this reason, Treasury auctions have become an attention magnet for markets as investors look to see whether there are enough willing buyers.
“Sloppy” auctions were the cause of last fall’s bond crash, market veteran Ed Yardeni told Business Insider. Many buyers have been put off by America’s skyrocketing debt, and if little effort is made to address it, more disappointing auctions could be in store, he said.
Both the Treasury and the Federal Reserve made liquidity adjustments this week to take the pressure off buyers, but it remains to be seen whether these efforts are enough.
In the event that the 5% limit is ever exceeded for this reason, the president of Yardeni Research said that things could turn out differently: “You know, this time we may find that the 5% remains, and then We will all ask ourselves whether the next step is in this direction.” six or back to four.
Investment firm SEI had similar concerns in April, adding that this year’s stubborn inflation data only exacerbates the problem in the near term. As consumer prices remain high, interest rates have remained unchanged, halting the rush to buy fixed income:
“We would not be surprised to see the 10-year Treasury yield test 5% again, even with the prospect of rate cuts looming on the horizon,” it said in a note.
However, Apollon Wealth Management’s Eric Sterner says markets would need to be even more pessimistic to justify a move beyond 5%. Only if inflation pushes the Fed to raise interest rates would that be a concern, but that seems unlikely.
Still, yields won’t fall anytime soon as long as inflation remains stable, he told BI:
“If we can get this one rate cut, we can potentially get closer to 4%,” he said. “But I don’t think we’ll get below 4%.”
The Dangers of 5%
When the 10-year yield broke 5 percent last fall, traders panicked and the S&P 500 plunged nearly 6 percent from its peak to trough in October.
Part of that is due to how quickly the yield has increased, Yardeni said, which isn’t the case this time.
“It was more of a clandestine operation that took place at a slower pace; “It didn’t attract anyone’s attention on the stock market,” he said. “Even the growth stocks have done well, even though they shouldn’t do well when bond yields rise.”
But exceeding the 5% mark could change that. Highs above 5% have historically had a negative impact on stocks, according to a note from Goldman Sachs. In 1994, even strong earnings struggled to drive stock prices higher in the face of higher yields.
Even Sterner agreed it’s a risk, if only in the short term: “Hypothetically, if we break above 5%, I think that could trigger a market correction or selloff of 10% or more.”
Read the original article on Business Insider