Government bond yields are at multi-year highs. The market is looking for a pain threshold for stocks
Rising oil prices have intensified the sell-off of U.S. government debt, while the expansion of the U.S. Treasury’s bond-buyback program has not yet produced a sustained effect
On the Japanese market, yields on local 10-year government bonds reached their highest level since 1996 / Photo: X/NYSE
The sell-off in the longest-term U.S. Treasury bonds has reached a level not seen in the market for more than two decades, according to Bloomberg. The sell-off in debt securities is also continuing in Japan. Meanwhile, investors are trying to determine how high a yield on Treasuries the stock market can withstand.
Investors are demanding compensation
Following a spike in Brent crude oil prices, the yield on 30-year U.S. Treasury bonds rose to 5.44% during trading on September 24—a high not seen since 2004, according to Bloomberg. “There are no words left to describe the yield on 30-year bonds,” the agency quotes Ed al-Husseini, a portfolio manager at Columbia Threadneedle, as saying.
Economic growth, high energy prices, inflation, and rising government borrowing are putting pressure on the bond market, according to Bloomberg. “Look, if we’re going to invest money for 30 years, we need much higher compensation,” al-Husseini said, conveying the market participants’ position.
The sell-off of government bonds continued worldwide on Thursday. British, French, and German government bonds fell significantly in price, according to the Financial Times (FT). In the Japanese market, which reopened after a three-day break, the yield on local 10-year government bonds reached 3.075%—a high not seen since 1996, according to Bloomberg.
High oil prices and strong U.S. economic data have prompted investors to reassess the likelihood that the Fed—which already raised rates last week—will continue to do so, the FT explains. Market participants now estimate the chances of such a move at the October meeting at about 70%, although at the start of trading on Wednesday, the probability was 50-50. “There have been significant changes. The Fed has begun to tighten policy,” the newspaper quotes Andrew Pisa, head of investment strategy at Russell Investments, as saying.
Rising yields on 30-year bonds are preventing the U.S. Treasury from lowering the cost of long-term borrowing. In mid-August, Treasury Secretary Scott Bessent expanded the government debt buyback program, but it had almost no lasting effect on the market, according to Bloomberg.
Where is the limit for stocks?
For stock investors, the yield on 10-year U.S. Treasury bonds remains one of the key benchmarks, according to Reuters. For a long time, the 5% mark was considered a dangerous threshold for global financial markets. “People think there’s some kind of magic number for Treasury yields at which problems begin, but it’s a relative measure, not an absolute one,” says Mike Bell, head of market strategy at BlueBay Asset Management. He suggests comparing U.S. Treasury yields with the price-to-earnings ratio.
JPMorgan analysts suggest that the yield on 10-year U.S. Treasuries—a level that is painful for the stock market—may now be in the 5.5–6% range, according to Reuters. The bank attributes this rise to structural changes in the economy. The roles of AI, healthcare, and services have grown, and many companies in these sectors continue to invest and expand regardless of borrowing costs. However, Treasury yields have not remained above 5% long enough to test this hypothesis, the agency notes.
Capital is changing course
Paul Jackson of Invesco is already reducing his equity holdings and shifting some of his funds into government bonds because of their high yields. “If Treasury yields continue to rise, there is a risk that the stock market will be lower in 12 months,” he said (as quoted by Reuters).
High yields on U.S. Treasury bonds typically strengthen the dollar and make assets denominated in that currency more attractive, drawing capital away from emerging markets. Last week, bond funds in these countries faced their largest outflow in several months. Alison Shimada, head of emerging markets equities at Allspring Global Investments, considers the current situation “suboptimal” but by no means critical, according to Reuters.
Stock markets are not yet showing signs of a crash, but this may simply be because investors have not yet factored U.S. Treasury yields above 5% into their long-term earnings forecasts, according to Neil Birrell, chief investment officer at Premier Miton. “The markets look fine until everyone recalculates their valuation models,” he says (as quoted by Reuters).
This article was AI-translated and verified by a human editor
