This week, a junior analyst on a lower Manhattan trading floor most likely witnessed the 10-year Treasury yield tick past 4.59% and experienced the specific kind of dread that has recently become familiar to anyone working in fixed income. The number itself appears unremarkable. It would have been unremarkable a few years ago. However, that one line on a Bloomberg terminal is doing something out of the ordinary given where this market has been and where an increasing number of strategists think it will go. It is changing the way investors view nearly everything else.
The yield touched 4.687% earlier in the week, its highest level since January 2025, and closed Wednesday at 4.595%. That’s a nearly 30 basis point increase in about a month, which doesn’t seem significant until you consider what bonds are meant to do. They are meant to be the dull part. The ballast. While stocks chase headlines, something hums softly in the background. They are no longer humming.
The odd thing is how slowly the change has been embraced by the larger market. In a research note this week, Steven Blitz of TS Lombard, who has been cautioning his clients for months, stated plainly that the market is still catching up to the changes in the world. Before this cycle ends, he believes the yield could reach 5.5% or even 6%. That is no longer a fringe viewpoint. ING’s Patrick Garvey has been advocating for 4.75%. Standard Bank’s Steven Barrow believes that 5% is achievable this year. Sticky inflation, widening fiscal deficits, a labor market that hasn’t collapsed, and a Federal Reserve that might have run out of room to cut are all indicators of the same unsettling concoction.
Speaking with people in the bond world gives me the impression that something structural has changed. The CPI for April was 3.8% higher than the previous year. PPI reached 6.0%. Both exceeded expectations. The slow-burning standoff with Iran has kept oil prices above $107 per barrel. The numbers are mutually reinforcing. Increased energy costs drive up corporate profits, which drive up consumer prices, which drive up wage demands, and so on, keeping the entire system operating at a higher temperature than the Fed desires. It’s difficult to ignore the fact that nearly all of the disinflation assumptions from 2024 have been quietly retired.
Kevin Warsh, the new Fed Chair, will take over this mess on Friday. Lately, President Trump has shown signs of softening after initially appearing determined to rely on him for cuts. Trump told reporters this week, “I would let him do what he thinks,” which is either a vote of confidence or a courteous way to distance himself from an issue that doesn’t seem to be solvable by jawboning. We’ll learn a lot from the June meeting. Blitz contends that it is essentially an easing if Warsh keeps rates unchanged while inflation rises. That would be penalized by markets.
Stocks have already begun to decline. The Dow fell 322 points, the S&P 500 fell 0.67%, and the Nasdaq lost 0.84% during Monday’s session—its third consecutive decline. The market has been living above the 10-year bond yield threshold of 4.5%, which Morgan Stanley identified as the point at which bond yields start to surpass equity valuations. In a single session, the materials sector fell 2.3%. Naturally, tech suffered the most.
However, not all people are pessimistic. According to Vanguard, the current yield is “near the upper end” of their anticipated range, and they are still purchasing duration. Max Kettner of HSBC is “extremely bullish” about stocks, citing an 87% earnings beat rate this quarter, which he calls “crazy, simply crazy.”
Which is it, then? A loud diversion during a protracted bull run, or a repricing of everything? Most likely, no one really knows yet. However, it’s becoming more difficult to claim that this is noise as the 10-year keeps rising.
