The bond market is getting uncomfortable again
Stocks slipped Tuesday as another major market crossed a level investors have not seen in more than two decades.
The 30-year Treasury yield climbed to 5.61%, its highest level since 2002, while the benchmark 10-year yield reached 5.29%. Treasury prices move inversely to yields, leaving U.S. government bonds on pace for their worst September since 2023.
The stock market has absorbed the move relatively well so far, but the pressure increases as yields rise.
A 5% Treasury yield already gives investors an unusually attractive alternative to equities. Move significantly above that level and the math around stock valuations, corporate borrowing, mortgages and capital spending starts changing quickly.
Fundstrat economic strategist Hardika Singh pointed to 5.5% on the 10-year Treasury as an important historical level, arguing that equity valuations have tended to compress beyond it.
The 10-year is now only about 21 basis points away.
The market may not need a recession or earnings collapse to come under pressure. A sufficiently high risk-free return can change what investors are willing to pay for everything else.
Oil is making the Fed’s job harder
The bond selloff is arriving just as energy prices are adding another layer of inflation risk.
Oil remains elevated amid continuing disruption in the Middle East, feeding directly into transportation, manufacturing and consumer costs. The longer those prices remain high, the more difficult it becomes for the Federal Reserve to confidently move toward easier monetary policy.
Instead, traders are increasingly preparing for additional tightening.
CME’s FedWatch tool currently puts the probability of another rate increase at the Fed’s October meeting at roughly 70%.
That combination has been particularly difficult for bonds. Higher oil prices can keep inflation expectations elevated, while expectations for additional Fed hikes push investors to demand higher yields from Treasurys.
The same pressure then spreads into the broader economy because the 10-year Treasury helps determine borrowing costs across mortgages, corporate debt and other forms of credit.
The 5.5% level could force Wall Street to redo the math
Higher yields affect more than bond portfolios.
When Treasury rates were near zero, investors had strong incentives to pay high multiples for future growth because safer alternatives offered almost no return. At a 10-year yield approaching 5.5%, investors can earn a substantial return from government debt without taking equity risk.
That raises the hurdle rate across markets.
High-growth technology stocks become more sensitive because much of their valuation depends on earnings expected years into the future. Companies refinancing debt face higher interest expense. Homebuyers face higher mortgage rates. Private equity transactions become harder to finance. Even profitable corporations have to compare new investments against an increasingly attractive return available in Treasury securities.
This is why another 20 or 30 basis points could matter disproportionately.
The difference between a 5.29% and 5.5% Treasury yield looks small on a chart, but crossing that threshold could force investors to rethink what they are willing to pay for risk.
There may be another force behind the selloff
Fed policy and inflation may not be the only factors pushing long-term yields higher.
Yardeni Research’s Ed Yardeni has pointed to a potential unwind of the yen carry trade, where investors borrow money cheaply in Japan and move that capital into higher-yielding assets elsewhere.
For years, extremely low Japanese rates created a large pool of inexpensive capital that could flow into global bond markets. If that trade continues reversing as Japanese rates rise and currency dynamics shift, some of that structural demand for U.S. Treasurys could disappear.
That would matter because Washington continues issuing enormous amounts of debt while investors demand greater compensation to hold long-duration bonds.
The immediate number to watch is now the 10-year.
At 5.29%, it has not yet reached the 5.5% level Fundstrat identified as historically important for equity valuations. But it is getting close enough that every oil move, Fed signal and bond auction carries more weight.
If the 10-year crosses 5.5% and stays there, the Treasury market may stop being background noise and become the main event for stocks.
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