Could there be a repeat of five percent returns? For analysts, it all depends on fiscal policy and inflation. wsmahar/Getty Images
The benchmark 10-year U.S. Treasury yield is below the level that caused a massive collapse last fall.
However, persistent inflation and weak U.S. Treasury auctions could push yields above the five percent mark.
Once this threshold is crossed, investors could be in for a sharp correction in stocks.
US Treasuries may not be the fastest market. But a rise in yields not too far from current levels could eventually make things anything but boring.
While this year’s stock trend is distracting Wall Street, the 10-year benchmark interest rate has risen 83 basis points since 2023. In April it was 4.7 percent, not far from the threshold that unbalanced the markets last fall: five percent.
Bonds
Bonds are a form of debt. They are issued by companies, governments or other organizations to raise capital. Anyone who buys a bond lends money to the issuer, i.e. the issuer of the securities, for a set period of time. In return, the investor receives regular interest payments. At the end of the term, the nominal amount of the bond is repaid.
Bonds are generally considered to be less risky than stocks. However, the risk depends on the issuer. Government bonds, especially from stable countries, are considered very safe. Corporate bonds could be riskier. This often depends on the creditworthiness of the issuer.
When that 16-year peak was broken in October, it triggered one of the worst market collapses in history. While U.S. Treasury bonds fell on Friday following a mixed jobs report, markets are still cautious about further upside given stubborn U.S. inflation and overall economic strength.
Could there be a repeat of five percent returns? For analysts, everything depends on fiscal policy and inflation in the US.
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Where the returns are moving
The “bond king” Bill Gross is among those urging caution, telling investors that high government debt will drive yields to 5 percent over the next 12 months.
Yields move inversely to bond prices, meaning weak demand drives interest rates higher. For this reason, government bond auctions have become interesting events for markets as investors look to see if there are enough willing buyers.
“Sloppy” auctions were the cause of the bond crisis last fall, market veteran Ed Yardeni told Business Insider. The bonds are sold to interested parties through so-called auctions. Many buyers are through this America’s exploding debt has been deterred, and with little effort to curb them, more disappointing auctions could be on the horizon, he said.
Both the Treasury Department and the Federal Reserve (Fed) made liquidity adjustments this week to take the pressure off buyers. It remains to be seen whether these efforts will be enough.
In the event that the five percent mark is exceeded for this reason, things could go differently, according to the president of Yardeni Research: “This time we could find that the five percent will not be reached, and then we will all be ask whether the next step is towards six or back to four.”
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Investment firm SEI raised similar concerns in April, adding that stubborn inflation data this year would only exacerbate the problem in the near term. With consumer prices remaining high, interest rates have remained unchanged, preventing a run on fixed income: “We would not be surprised to see the 10-year Treasury yield cross five percent again, even if interest rate cuts are in place “The view stands,” it says in one notice.
However, Apollon Wealth Management’s Eric Sterner believes markets would have to become even more pessimistic to justify a rise above five percent. Only if inflation forced the Fed to raise interest rates would this be a cause for concern. But that doesn’t seem likely.
Still, yields won’t fall any time soon as long as inflation continues, he told Business Insider: “If we can get this one rate cut, we can potentially move towards 4 percent,” he said. “But I don’t think we’ll get below four percent.”
The dangers of five percent
When 10-year yields broke through the 5 percent mark last fall, traders panicked, and the S&P 500 fell nearly 6 percent from its peak in October to its trough. Part of that is due to how quickly the yield has increased, Yardeni said, which isn’t the case this time.
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“It was a more stealthy movement that happened at a slower pace; it has not attracted any attention in the stock market,” he said. “Even the growth stocks have done well, even though they shouldn’t do well when bond yields are rising.”
However, that could change if the five percent mark is exceeded. According to a note from Goldman Sachs, highs above 5 percent have had a negative impact on stocks in the past. In 1994, even with high profits, it was difficult to boost stocks against higher returns.
Even Sterner agreed that this is a risk, if only in the short term: “Hypothetically speaking, if we go above five percent, that could trigger a market correction or sell-off of ten percent or more.”
Disclaimer: Stocks and other investments generally involve risk. A total loss of the capital invested cannot be ruled out. The articles, data and forecasts published are not a solicitation to buy or sell securities or rights. They also do not replace professional advice.
This article was translated from English by Jonas Metzner. You can read the original article here read.