Is the US Stock Market Alarm Ringing? 10-Year Treasury Yield Surges Past 5%, Highest in Nearly 3 Years

The yield on the US 10-year Treasury note surged past 5% on Monday (14th), hitting its highest level since October 2023, as investors brace for the Federal Reserve’s (Fed) upcoming rate decision. This benchmark yield, which influences mortgage, auto, and credit card rates, climbed more than two basis points to reach 5%. If it surpasses 5.02%, it would mark the highest level since July 2007, before the global financial crisis.

The yield on the 2-year Treasury, most sensitive to Fed policy, also rose over two basis points to 4.666%, briefly touching its highest level since July 2024 last week. The 30-year Treasury yield climbed to 5.374%. Bond prices move inversely to yields, and one basis point equals 0.01 percentage point.

Last Friday’s release of the August Consumer Price Index (CPI) met expectations, but inflation remains well above the Fed’s 2% target. This was the final inflation data released before the Fed’s two-day policy meeting on Tuesday and Wednesday. According to CME Group’s (CME-US) FedWatch tool, markets currently assign a 90% probability to a 25-basis-point rate hike by the Fed.

Jay Woods, Chief Market Strategist at Freedom Capital Markets, said that based on economic data and market expectations, a rate hike would be a clearer decision and could even trigger a market rebound afterward. Conversely, if the Fed holds steady, it may be interpreted as falling behind the curve again, potentially sparking negative reactions.

The reason behind the rise in Treasury yields determines their impact on equities. If higher yields stem from robust economic growth, they may not necessarily hurt stocks. However, if they reflect resurgent inflation, widening government deficits, or stress in the Treasury market, the risks become significantly elevated.

Jason Ware, Chief Investment Officer at Albion Financial Group, pointed out that an imbalance in supply and demand—caused by heavy bond issuance from both the US Treasury and corporations competing for investor funds—is contributing to higher yields. Still, crossing the psychological threshold of 5% for the 10-year yield doesn’t immediately crash markets. In fact, slowing consumer spending or a pullback in AI investments might pose greater threats to equities.

Yet, massive fiscal deficits, heavy issuance volumes, sticky inflation, and surging oil prices are pushing up the term premium—the extra yield investors demand for holding long-term bonds. Although US Treasury Secretary Scott Bessent has expanded the bond buyback program to suppress long-end yields, its impact remains limited against a daily trading volume of $1.2 trillion in the US Treasury market.

BMO-US strategists argue that expanded buybacks can only ease selling pressure but cannot resolve the fundamental factors driving yields higher on 10-year and 30-year notes. If financing costs, margin requirements, or market volatility increase, hedge funds engaged in high-leverage basis trades may be forced to unwind positions simultaneously, further amplifying the sell-off in Treasuries.

For now, investors continue to tolerate higher yields. As BMO notes, when the 10-year yield previously rose to 4.85%, US stocks weakened only slightly, and the S&P 500 Index has still gained over 11% year-to-date.