The 10-year Treasury yield is once again nearing the psychologically important 5% mark. The biggest question for investors may be what moves it over the line.
The benchmark yield is hovering around 4.96%, just shy of the 5% level last seen in October 2023. A rally driven by resilient economic growth would have a much different impact on stocks and the broader economy than one caused by a resurgence in inflation, heightened fiscal concerns, or stress in the Treasury market itself.
Jason Ware, chief investment officer at Albion Financial Group, said the recent rise in yields is due in part to an imbalance in supply and demand as large amounts of Treasury and corporate bond issuance compete for investors’ money, adding that he doesn’t expect the market to collapse just because the 10-year note is above 5%.
Rising yields are not necessarily bearish when accompanied by healthy growth. Weir pointed to the resilience of the economy and stabilization of core inflation, arguing that stocks would be more vulnerable to a slowdown in consumer spending and investment in artificial intelligence than above any 10-year benchmark.
The 10-year Treasury yield is a key benchmark for borrowing costs across the U.S. economy, influencing everything from mortgages to corporate bonds. It is also an important reference point for valuing stocks and other financial assets.
Niall O’Sullivan, chief investment officer at Marsh Investments, said many of the companies driving share price gains aren’t particularly sensitive to rising interest rates, limiting the immediate threat to their stock prices. He said the strong economic growth is supported by the large amount of capital investment currently being undertaken.
But the 5% level could start to become problematic as investors demand greater compensation for inflation and fiscal risks. Large federal deficits, large debt issuances, and persistent inflation are all contributing to higher term premiums, while oil price returns above $100 per barrel add another potential source of price pressure.
Treasury Secretary Scott Bessent is trying to limit pressure on the long end, including by expanding the stock buyback program. But these measures may have limits on the fundamental forces driving yields higher.
Strategists at BMO Capital Markets said that while a more aggressive share buyback program may help limit selling pressure, it “does not address the underlying factors driving upward pressure on 10-year and 30-year Treasury yields.”
The alternative route to 5% could be even trickier. It is a chaotic movement caused by stress in the government bond market itself.
George Awad, principal at Gibraltar Capital, highlighted the high leverage exposure of hedge funds that support the U.S. Treasury market, including spot futures trading. Higher funding costs, margin requirements, or volatility can force leveraged investors to exit positions at the same time, amplifying the selloff.
For now, investors seem willing to let yields rise. BMO noted that when the 10-year reached 4.85%, the decline in stock prices was only modest, and the S&P 500 index was still up more than 11% for the year.
Whether that continues remains to be seen.
