U.S. Treasury Yields Surpass 5%

For an extended period,the stock market displayed an unstoppable momentum,with the S&P 500 index soaring more than 50% from early 2023 to the end of 2024,accumulating an astonishing $18 trillion in value during this phase.However,Wall Street may be facing a disruptive factor that threatens this remarkable ascent: U.S.Treasury yields have surpassed the 5% mark.

For months,stock traders largely overlooked warnings from the bond market,focusing instead on unexpected windfalls brought by tax cuts and the seemingly limitless potential of artificial intelligence.Yet,as Treasury yields climb to this ominous threshold,stock values began to decline,placing risk at the forefront of traders' concerns last week.

The 20-year U.S.Treasury yield broke beyond the 5% barrier on Wednesday,eventually rebounding past this threshold on Friday,marking its highest level since November 2,2023.At the same time,the yield on 30-year U.S.Treasury bonds briefly surged above 5%,achieving its peak since October 31,2023.Since the Federal Reserve initiated a series of interest rate cuts in mid-September,these yields have notably increased by approximately 100 basis points,whereas the federal funds rate has decreased concurrently by 100 basis points.

Jeff Blazek,Co-Chief Investment Officer of Neuberger Berman's Multi-Asset Strategy,commented on this atypical situation,noting that over the past 30 years,mid- and long-term bond yields have generally remained stable or experienced slight increases following a series of rate cuts from the Fed.

Traders are keenly monitoring the policy-sensitive 10-year U.S.Treasury yield,which recently reached its highest level since October 2023 and is inching towards 5%.Fears are mounting that surpassing this critical level could trigger a notable correction in the stock market.The last time the yield briefly crossed this threshold was in October 2023; prior to that occurrence,one must look back to July 2007.

Matt Peron,Director of Global Solutions at Janus Henderson,stated,“If the 10-year Treasury yield reaches 5%,investors will instinctively sell stocks.This situation could take several weeks or even months to resolve,during which time the S&P 500 index might drop by 10%.”

The rationale behind such concerns is straightforward; rising bond yields enhance the allure of U.S.Treasury securities,while simultaneously escalating the costs for corporations to raise funds.

Last Friday,the repercussions for the stock market were palpable,with the S&P 500 index declining by 1.5%,marking the most significant single-day drop since mid-December,erasing virtually all of the gains that September excitement had imparted to 2025's performance.

In this tumultuous environment,Kristy Akullian,Head of Investment Strategy at BlackRock iShares,asserted that while there’s nothing magical about the 5% threshold—beyond the psychological barrier—perceptual obstacles might create "technical barriers." This suggests that rapid fluctuations in yields could frustrate any upward momentum in the stock market.

Investors are witnessing a striking anomaly: the yield of the S&P 500 is currently 1 percentage point lower than the yield on 10-year U.S.Treasury bonds—an occurrence unseen since 2002.In other words,the returns on significantly less risky assets compared to the U.S.stock market benchmark have not seemed this favorable for years.

Mike Reynolds,Vice President of Investment Strategy at Glenmede Trust,pointed out,"Once yields rise,it becomes increasingly difficult to rationalize valuation levels.Issues can arise if profit growth begins to decelerate."

Hence,it's no surprise that strategists and portfolio managers predict a bumpy road ahead for the stock market.Mike Wilson from Morgan Stanley forecasts that the stock market will struggle over the next six months,while Citi's wealth division is advising clients that bonds may present attractive buying opportunities.

Recent robust employment data has prompted economists to revise their expectations for interest rate cuts this year downward,making the path towards a 5% yield on the 10-year Treasury more tangible.Yet,this predicament is not solely a concern for the Federal Reserve.The global bond sell-off is rooted in persistent inflation rates,hawkish stances from central banks,soaring government debt,and the extreme uncertainty brought by incoming administrations.

Mark Malek,Chief Investment Officer at Siebert,stated,"When you're in a disadvantageous position,a yield surpassing 5% signifies that everything is unpredictable."

Equity investors now face a pressing question: are there serious buyers willing to step in,and when might they do so?

Rick de los Reyes,a portfolio manager at Raymond James,commented,"The real question is how we will develop next.If interest rates hover between 5% and 6%,concerns will mount; however,if rates stabilize around 5% and eventually decline,everything will be fine."

Market experts contend that the crux of the issue isn't merely rising yields,but rather the underlying reasons behind this increase.Yields that ascend gradually with an improving U.S.economy can be uplifting for stocks.In contrast,a rapid rise in yields spurred by fears surrounding inflation,federal deficits,and policy ambiguity is a troubling indicator.

In recent years,every instance of a swift yield increase has prompted stock sell-offs.This time,the distinction lies in a sense of complacency amongst investors,as demonstrated by their optimistic outlook amid valuation bubbles and policy uncertainties—placing the stock market in a precarious position.

"When you observe rising prices,a robust job market,and an overall strong economy,all signs point towards potential inflation," reflected Eric Diton,President of Wealth Alliance.

One potential refuge for stock investors could lie within the sector that has driven most of the returns over the past few years: large tech companies.The so-called 'Magnificent Seven'—Alphabet,Amazon,Apple,Meta,Microsoft,NVIDIA,and Tesla—continue to showcase rapid profit growth alongside substantial cash flows.Furthermore,looking forward,they are expected to be the prime beneficiaries of the forthcoming AI revolution.

Eric Sterner,Chief Investment Officer at Apollon Wealth,noted,"During periods of market turbulence,investors often gravitate towards high-quality stocks with strong balance sheets and cash flows.Recently,large tech stocks have become part of this defensive strategy."

This is precisely what many stock investors are hoping for: that the influence of these major tech firms and their relative safety will mitigate any softness in the broader market.Collectively,these seven tech giants account for more than 30% of the S&P 500 index's weight.

Simultaneously,despite interest rate cuts from the Federal Reserve,the pace at which these cuts may occur could be slower than anticipated.This situation differs dramatically from 2022,where swift rate hikes from the Fed led to significant index declines.

Nevertheless,due to the multifaceted nature of interest rate risks,numerous Wall Street professionals are advising a cautious approach for investors,at least for the time being.

According to Peron of Janus Henderson,"The companies within the S&P 500 that have experienced the most significant gains may be particularly vulnerable,including the Magnificent Seven,while some inflated mid- and small-cap growth sectors may also face pressure.Our firm has consistently advocated for a focus on quality and valuation.This is of paramount importance over the coming months."

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