10-year U.S. Treasury is closing in on 5%

The 10-year Treasury yield is once again closing in on the psychologically important 5% threshold. For investors, the biggest issue may be what drives it across the line.

The benchmark yield is hovering around 4.96%, within striking distance of the 5% mark it last touched in October 2023. A climb fueled by resilient economic growth would carry very different implications for stocks and the broader economy than one driven by resurgent inflation, mounting fiscal concerns or stress within the Treasury market itself.

The latest rise in yields stems partly from a supply-demand imbalance as heavy Treasury and corporate issuance competes for investor capital, said Jason Ware, chief investment officer at Albion Financial Group, who added he doesn’t expect markets to break simply because the 10-year moves above 5%.

Higher yields aren’t necessarily bearish if they’re accompanied by healthy growth. Ware pointed to a resilient economy and steady core inflation, arguing that stocks would be more vulnerable to a slowdown in consumer spending or artificial-intelligence investment than to the 10-year crossing an arbitrary threshold.

The 10-year Treasury yield is a key benchmark for borrowing costs across the U.S. economy, influencing everything from mortgages to corporate debt. It is also a crucial reference point for valuing stocks and other financial assets.

Many of the companies driving the equity rally aren’t especially sensitive to higher rates, limiting the immediate threat to stocks, according to Niall O’Sullivan, chief investment officer at Marsh Investments. The heavy capital expenditure currently being deployed supports strong economic growth, he said.

However, the 5% level may start to be a problem as investors demand greater compensation for inflation and fiscal risks. Large federal deficits, heavy debt issuance and sticky inflation have all contributed to a rising term premium, while oil’s return above $100 a barrel has added another potential source of price pressure.

Treasury Secretary Scott Bessent has sought to contain pressure at the long end, including through an expanded buyback program. But such measures may have limited power against the fundamental forces pushing yields higher.

BMO Capital Markets strategists said a more active buyback program could help limit selling pressure but “fails to address the prevailing fundamental drivers of the upward pressure on 10- and 30-year yields.”

Another route to 5% could be more troublesome still: a disorderly move caused by stresses in the Treasury market itself.

George Awad, principal at Gibraltar Capital, has highlighted the large amount of leveraged hedge-fund exposure underpinning the Treasury market, including the cash-futures basis trade. A jump in funding costs, margin requirements or volatility could force leveraged investors to unwind positions simultaneously, potentially amplifying a selloff.

For now, investors appear willing to tolerate higher yields. BMO noted that when the 10-year reached…