Amid a global bond market sell-off, a key financial market indicator is approaching a critical psychological threshold. US stock markets came under pressure on Tuesday, with the Nasdaq 100 index declining 0.8% and the "Magnificent Seven" tech stocks all closing lower, while the S&P 500 dropped 0.7%. Simultaneously, the Cboe Volatility Index (VIX) jumped from near multi-year lows, indicating rising risk-averse sentiment in the market.
At the center of this storm is the US 30-year Treasury yield, which has risen above the 5% level for the first time since July. This trend is not isolated, as long-term government bond yields in the UK and Japan have also experienced similar upward movements. Despite widespread market expectations that the Federal Reserve will cut rates later this month, the climb in long-term rates highlights market concerns about inflation and government fiscal conditions that have overshadowed focus on central bank short-term monetary policy.
For investors, the 5% yield represents not only a technically significant level but also a psychological warning line. After US stocks have recorded a remarkable 29% gain since early April, rising borrowing costs are forcing markets to reassess elevated equity valuations, particularly for interest rate-sensitive growth stocks, raising questions about the sustainability of future economic and earnings growth.
**Global Sell-off and Fiscal Concerns**
The surge in long-term US Treasury yields reflects the broader context of a global government bond sell-off. This week, long-term bonds face renewed pressure, reflecting investor concerns about two core issues: ballooning budget deficits and increased bond issuance volumes coming this month.
The market is showing significant divergence: on one hand, money markets are betting the Federal Reserve will cut rates by 25 basis points at its September 17 meeting, which would drive down yields on interest rate-sensitive two-year Treasuries; on the other hand, investors worry that growing US federal debt will lead to an oversupply of long-term Treasuries, demanding higher returns as compensation.
According to Matt Maley, chief market strategist at Miller Tabak + Co.: "If inflation is allowed to rise again, regardless of what the Fed does with short-term rates, markets will push long-term rates higher."
**The 5% Psychological Threshold and Stock Valuation Pressure**
When a key asset's yield touches round number thresholds like 5%, it often triggers dramatic swings in market sentiment. Michael Purves, CEO and founder of Tallbacken Capital Advisors LLC, stated: "For equity investors, when they see 30-year Treasury yields hit round numbers like 5%, market volatility typically increases because some investors feel the government is losing control." He added that "there are also algorithmic trading programs that begin selling stocks when yields reach specific thresholds."
Historical experience shows that 30-year Treasury yields breaking 5% has sent different signals to Wall Street. In May this year, when the yield broke 5%, the S&P 500 quickly fell 2.3%; but when it surged again in July, it barely managed to halt the market's upward momentum. However, the current environment is different, as the S&P 500's valuation has become stretched after substantial gains over the past four months. The index's forward price-to-earnings ratio has reached 22 times, a level that has only been exceeded during the dot-com bubble and the post-COVID pandemic rebound over the past 35 years.
**Policy Dynamics and Economic Outlook Uncertainty**
Current market dynamics are also intertwined with a complex policy environment. Trump has intensified his criticism of the Federal Reserve, demanding significant rate cuts, which could exacerbate any price pressures from his tariff policies. Meanwhile, a federal appeals court ruled that most of Trump's tariff measures are impermissible. Removing tariffs might reduce one source of government revenue but could also alleviate price pressures.
Regardless, the impact of rising rates on stock investors is direct. Higher rates raise concerns about future economic growth and how increased capital costs will affect businesses and consumers. As Maley noted: "This raises questions about future earnings growth, which is not good news for an expensively valued stock market."
Looking ahead, markets are closely watching US job openings data to be released later Wednesday for new clues about the Fed's room for rate cuts. Economists forecast that July job openings will fall to 7.382 million. Evelyne Gomez-Liechti, strategist at Mizuho International Plc, stated: "If job openings data shows an unexpected decline, particularly if accompanied by increased layoffs and reduced voluntary departures, this could be a good combination that prompts investors to buy US Treasuries on dips."