US Yields at 5% Tug Traders Between Dip-Buying Greed and Fear

Link copied

US Yields at 5% Tug Traders Between Dip-Buying Greed and Fear.

treasuries & bonds :: 2026-05-08 :: source - bloomberg

By Michael MacKenzie, Ye Xie and Ruth Carson

(Bloomberg) -- In some circles on Wall Street, the hottest debate isn’t about a tech-stock bubble or $100 oil as the new norm. It’s whether 30-year Treasury yields will mount a sustained push over 5%.

Most Read from Bloomberg

The yield, which determines the US government’s long-term borrowing costs, briefly topped that level this week, leaving it hovering near a two-decade high and just below the peak of late-2023, when the Federal Reserve was still trying to contain the post-pandemic inflation surge.

The shift has been driven largely by fear that consumer prices will spiral again due to the oil-price shock unleashed by the US war on Iran. But other forces are also at work.

The world’s largest economy has been surprisingly resilient. The budget deficit means waves of bond sales that have pushed the nation’s debt over 100% of its annual gross domestic product. And for all of President Donald Trump’s pressure on the Fed to cut interest rates, traders are wagering that even with his handpicked chair, Kevin Warsh, taking over, the central bank next year may wind up hiking instead.

Some are even questioning the traditional convenience of holding US debt.

Elevated bond yields would have repercussions for global markets, the economy and politics by squeezing consumers and businesses with higher costs of credit cards, mortgages and business loans and exerting a dragging on growth.

A yield of 5% is a “psychological threshold that tends to reignite worries of bond vigilantes and higher interest rates going forward,” said Gennadiy Goldberg, head of US interest rate strategy at TD Securities.

The bond-market’s movements are extending what has been a vexing run for forecasters ever since the end of the pandemic. After Treasuries tumbled in 2022 as the Fed raised rates, many investors reckoned that bonds would bounce as the tightening drove the economy into a recession, only to be blindsided by its surprising strength.

Even after the central bank started easing in late 2024 — and Trump’s trade war darkened the outlook — Treasury yields didn’t come down, in part because traders had already priced them in. In fact, 30-year yields have climbed by nearly a full percentage point since then, the biggest jump at a time when the Fed was easing monetary policy since at least the 1980s.

“The back-end seems relatively sticky at the 5% level and we’ll see whether that holds,” said Brij Khurana, portfolio manager at Wellington Management. “The bond market is reacting to the inflation pressures of the war, but also to the substantial growth that we’ve gotten in the last few months.”

The war rapidly upended the outlook since late February and left investors struggling to gauge whether costlier oil prices will reverse once it ends, or be significant enough to fan inflation and finally derail the US economic expansion.

With the Strait of Hormuz still closed and oil around $100 a barrel, traders are wagering that policymakers in the UK and Europe will need to start raising rates to contain the impact.

In the US, overnight-indexed swaps were pricing in a 43% likelihood of a Fed rate cut by March next year just three weeks ago, but they now signal a more than a 10% chance of a hike. Expectations largely held even as bond yields pulled back slightly since Monday on revived hopes of a Middle East peace deal.

Yields on 30-year Treasuries were little changed early Friday at 4.96%.

“Even if the Strait is reopened, any initial relief rally may be short-lived,” said John Canavan, an analyst at Oxford Economics. “It will take significant time for oil production to return to normal.”

The US isn’t alone in seeing a rising cost of borrowing. Strategists at National Bank of Canada estimate the average of 10- and 30-year yields across the Group-of-Seven countries ended April at a 17-year high, while Blackrock Investment Institute is declaring “higher yields are here to stay.”

Despite the selloff in bonds, the US stock market has rallied to record highs as the AI spending boom and strong corporate earnings overshadowed the Middle East risks and a slowdown in the job market.

But Bank of America Corp. strategist Michael Hartnett is telling clients that a sustained push in the 30-year rate above 5% is a point at which “the door to doom starts to open,” warning that bubbles often end with a sharp jump in yields.

A key question for traders is whether the recent episode will mirror what happened at the peak of the Fed’s rate hikes in late 2023 and again after the market meltdown caused by Trump’s tariffs in the middle of last year.

In both cases, the 30-year yield only briefly held over 5%, delivering big gains to investors who bought at those peaks. A similar dynamic may play out again if a US-Iran deal means the oil shock fades or if the economy stalls, reviving bets on Fed rate cuts.

“We think market pricing remains too hawkish,” Krishna Guha, vice chairman at Evercore ISI, wrote in a report to clients. “A deal with oil moving lower is consistent with Fed cuts delayed not derailed.”

What Bloomberg’s Strategists Say...

“Long-bond yields have nudged back below 5% but remain extremely elevated by the standards of recent history, particularly given Fed policy over the past couple of years. Yields probably need a Fed hike to stick around here.”

— Cameron Crise, MLIV macro strategist

Click here for more

Still, a disorderly rise in the Treasury 10-year yield through 5% typically doesn’t bode well for the globe’s economies or stocks. Such a breach was followed by US recessions in 2001 and 2007, or at least triggered bouts of volatility in equities. The 10-year note yielded 4.38% Friday.

Ed Al-Hussainy, portfolio manager at Columbia Threadneedle Investments, is among those who have been buying the longest-dated Treasuries to seize on the recent move, but even he has reservations.

“I’m very nervous,” he said. “The US growth story is better than it was six months ago and versus expectations at the beginning of the year, so it puts a higher floor under rates.”

One risk, he said, is that the Fed will cut rates prematurely, anticipating the impact of higher oil prices will be temporary.

He said that would worry the bond market by suggesting the Fed may be prepared to tolerate inflation staying above its 2% target. “Then owning longer-dated bonds is in trouble.”

US economic growth accelerated at the start of the year with inflation-adjusted gross domestic product increasing at an annualized 2% in the first quarter. Forecasters expect the April jobs report on Friday to show a solid 65,000 increase in payrolls, accelerating wage growth and a stable unemployment rate.

The elevated level of rates has been a strong source of frustration to Trump heading toward this November’s congressional elections. He repeatedly lashed out at Fed Chair Jerome Powell for not cutting borrowing costs faster.

Early last year, Treasury Secretary Scott Bessent said the administration’s fiscal plans would help pull down bond yields by taming the deficit, which would curb the supply of Treasuries and increase investor confidence.

Instead, the uncertainty sown by the president’s tariffs — which pushed up import prices — kept yields elevated as the the Fed shifted into wait-and-see mode. The US debt held by the public has swelled by more than $2 trillion to nearly $31 trillion, surpassing the size of the economy’s annual output.

The Congressional Budget Office is projecting that Trump’s tax cuts will push it to 120% in a decade, surpassing the record levels seen during World War II.

“A lot of the problems with higher rates and inflation are linked back to Trump and his policies,” said Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis. “There’s a huge irony to all of this that cannot be missed.”

--With assistance from Masaki Kondo and Michael Msika.

(Client)