U.S. Treasury Yield Nears Critical 5% Threshold, Introducing New Risks to Markets and Economy

A wave of selling in U.S. Treasuries continues to intensify, pushing the yield on the benchmark 10-year note to 4.97% over the weekend, dangerously close to the critical 5% threshold. This has triggered deep anxiety across Wall Street and Washington over the impact of elevated borrowing costs on the U.S. economy. A sustained close above 5% would mark the first time since 2007.

The surge in Treasury yields is being driven by multiple factors. President Trump’s threats of war against Iran have disrupted energy supply expectations in the Middle East, sending oil prices to a four-month high. Meanwhile, the artificial intelligence (AI) boom has fueled a wave of corporate bond issuance and economic stimulus, while the federal deficit has already reached $2 trillion in the first 11 months of the fiscal year, adding further pressure to bond markets.

Treasury Secretary Scott Bessent attempted to curb the rise in yields through an expanded buyback program, but the initial operation had limited effect, and yields continued to climb.

Market attention is now fully focused on the Federal Reserve interest rate meeting chaired by Fed Chair Kevin Warsh. Following hotter-than-expected core inflation data, futures markets now assign approximately a 90% probability to a 25-basis-point rate hike by the Fed.

Facing inflation and bond market volatility, Tracy Chen, Portfolio Manager at Brandywine Global Asset Management, stated: "The Fed is clearly behind the curve—yields will certainly rise and breach 5% in the medium term." Ian Lyngen, Head of U.S. Rate Strategy at BMO Capital Markets, expects the 10-year Treasury yield to surpass 5% "in the very near term."

Grace Peters, Global Investment Strategist at JPMorgan Chase Private Bank, warned: "If bond yields move to 5% or 5.25%, equities will experience 'indigestion.'" Daleep Singh, Chief Global Economist at PGIM Credit, believes that the more credible the Fed appears in its fight against inflation, the more it can reduce the risk premium embedded in the long-end of the yield curve over time. Columbia Threadneedle Portfolio Manager Ed Al-Hussainy cautioned: "If the Fed ultimately does not hike rates, the sell-off in long-dated bonds could become even more chaotic."

Morgan Stanley strategist Jay Barry’s team believes a rate hike this week is highly likely, though they remain bearish on the performance of long-dated U.S. Treasuries.