The 5% risk threshold for US Treasury yields has been breached
The yield on the 10-year US Treasury note, which acts as a global financial risk warning level, has gone above 5%. Now investors are watching to see if it will hit 6%.
The 5% warning threshold has been crossed.
For a long time in the past, a 5% yield on the 10-year US Treasury was the default risk threshold for global investors. Whenever the yield reached this level, the market would generally experience a period of volatility and adjustment. The recent market situation has broken this conventional perception. This month, the 10-year US Treasury yield broke through the 5% threshold, and it did not trigger severe market turmoil. This has led investors to adjust their expectations and start to focus on the potential impact of a 6% yield.
Industry institutions stated that 5% has never been a hard switch to trigger a crisis. It is more of a psychological curse formed by the market over the long term. When judging market risks, one should not only look at the absolute value of the yield, but also focus on the relative cost-effectiveness of US Treasury yields compared to other investment categories. Among them, the comparison of stock dividend yields has the highest reference value. When US Treasury yields rise, the stock market often experiences a significant correction.
Changes in the economic structure have raised the critical point of interest rate risks.
In the old days it was thought that if interest rates went above 5% then the economy would be choked. However, this rule has now failed. The core reason lies in the structural changes in the US economy. New industries such as AI and healthcare have changed interest rates. These sectors are now the main forces driving economic growth. The uniqueness of the development of these emerging industries means that even if market borrowing costs rise, enterprises will still invest and will not rapidly reduce production capacity or stop hiring as they do in traditional manufacturing. This weakens the suppression effect of high interest rates on the real economy.
Based on this change, mainstream investors believe that the actual risk threshold for the US stock market and financial markets has now been raised to between 5.5% and 6%. The 5% level can only be regarded as a mid-point in the process of rising interest rates. The tolerance of funds for this round of rising interest rates has increased, and the market will not experience panic selling due to yields above 5% in the short term. However, when approaching 6%, global assets will undergo a deep revaluation.
High interest rates force a re-pricing of global assets.
The $29 trillion US Treasuries form the pricing basis for the global bond market and serve as the benchmark for the risk-free returns of all financial assets. Once the yield rises from 5% to 6%, it indicates a systematic increase in the global capital cost, and the valuation system of all assets needs to be re-adjusted. A 6% 10-year US Treasury yield not only reflects the market's expectation of long-term high inflation but also demonstrates investors' concerns about the US fiscal situation.
For ordinary investors, the current 5%+ US Treasury yield is already the top risk-free return level since 2007. Some investment institutions have calculated that the turning point for the global stock market is when the 10-year US Treasury yield reaches the 12-month average of 4.72%. Now, this average is 4.34%, temporarily remaining within the safe range.
The flight of funds from emerging markets has intensified.
Emerging markets have been the hardest hit by the rise in US Treasury yields. An increase in US Treasury yields will push up the exchange rate of the US dollar, making US debt assets more attractive. Funds will quickly withdraw from emerging markets and flow back to the US Treasury market. This leads to a double blow for emerging markets in terms of stocks and bonds, with liquidity tightening. Last week, emerging market bond funds witnessed the largest outflow in several months, and equity funds also suffered billions of dollars in withdrawals.
In the absence of market confidence, the issuance pace of sovereign bonds in emerging markets has slowed down, and the issuance volume is lower than that of the same period in previous years. The overall emerging markets have not yet triggered a systemic crisis, and the market as a whole is controllable. However, the current situation is not optimistic. In the future, as US Treasury yields continue to rise, the debt repayment pressure and exchange rate pressure in emerging markets will further intensify, and potential risks will increase.