Pimco, the world's largest bond fund, has issued a warning that the US 10-year Treasury yield risks breaking above 6%, a level the benchmark has not touched in 26 years.

Pimco Chief Investment Officer Dan Ivascyn said in an interview that a further significant climb in the 10-year Treasury yield from its current level of 5.29% is "achievable." He noted that over the past several weeks, leveraged investors such as hedge funds have suffered sustained losses in the $32 trillion market and been forced to liquidate positions to cut losses, and this technical selling pressure is one of the key factors pushing yields higher. Ivascyn also warned that if the 10-year Treasury yield rises to 5.5% or above, risk assets such as equities and credit bonds will see "quite pronounced declines."

The rise in yields has already begun to spill over into the real economy. Data shows that in the week ended October 8, the average rate on a 30-year fixed US mortgage rose to 7.4%, up 12 basis points from the previous week and the highest level since 2023, adding further strain on American households just weeks before a critical midterm election.

Stop-loss selling creates a negative feedback loop

Ivascyn's warning echoes widespread concerns among investors in the market recently. Several investors had previously cautioned that the Treasury market is falling into a "vicious cycle" — a sustained wave of selling pushes yields to new highs, which in turn forces more market participants such as real estate investment trusts to follow suit and sell bonds, further intensifying selling pressure. Ivascyn made clear that a considerable portion of recent market activity is directly related to "negative technical factors" and "stop-loss operations by platform-style hedge funds and other leveraged investors." He said that from a short-term trading perspective, a yield break above 6% "is certainly possible."

The US 10-year Treasury yield is currently at its highest level since the start of this century, driven by factors including inflation concerns triggered by the US-Iran war, a wave of large-scale debt financing by AI companies, and expectations of strong US economic growth. An inflationary environment is particularly unfavorable for bonds, because bonds offer investors a fixed income stream.

Risk assets under pressure, private market worries emerge

Ivascyn warned that a further rise in Treasury yields will hit risk assets. Although US stock indices remain near historic highs, the negative impact of high yields on some companies is already becoming apparent — this month, borrowing costs on bonds from the lowest-rated companies rose to 17%, the highest level since May 2020, driven both by higher Treasury yields and by investors demanding a greater risk premium. Outside public markets, Ivascyn expects that higher Treasury yields will also detonate problems in private markets "in slow motion," with commercial real estate particularly fragile. He pointed to "a large number of still-fragile capital structures and weak fundamentals" in that sector.

High yields may self-correct, overseas bond markets present opportunities

However, Ivascyn also pointed to the built-in checks on rising yields. He believes that as yields continue to climb, investors will gradually shift more asset allocation toward Treasuries to lock in high returns, which will become "a limiting factor on further yield increases." This week's auctions of US 10-year and 30-year Treasuries both drew strong demand, offering early signs of this trend. In overseas markets, Ivascyn sees more attractive alternatives. He said Pimco is "not as concerned as some about the US ability to sustain current deficit levels over the long term," but stressed that "there is no need to only hold US bonds." He cited the investment value of Australia's "high-quality credit" bonds and noted that although the UK faces "its own challenges," its bond yields remain higher than those of the US. Canada and Germany — especially when denominated in US dollars — also offer "very attractive yields and better initial fiscal positions."