Can U.S. Treasury yields hold above 5% this time?

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The 30-year US Treasury yield is once again approaching the 5% mark, and the market is divided over the validity of this historic "buy signal." In the past few years, whenever the long bond yield has reached 5%, betting on a bond rebound has been almost a guaranteed profitable trade—but this time, things may be different.

Since the outbreak of the Iran conflict, US Treasury yields have continued to rise; the 30-year yield has gone up a total of 35 basis points, with double pressure from rising inflation expectations and higher real interest rates. US March CPI rose to 3.3% year-on-year, hitting a two-year high. Meanwhile, market expectations for a rate hike by the Federal Reserve this year are gaining traction, putting bond bulls under pressure.

Overnight, US Treasury yields edged down slightly but the fundamental pressure remains. The 30-year Treasury yield fell by 3 basis points, but is still hovering near the 5% mark; the 2-year yield fell just 1 basis point.

There is a clear market divide over whether 5% can hold. Some analysts believe that repeated tests of the same technical level often signal an imminent breakout; others insist that downside economic risks will support bonds. Meanwhile, former Treasury Secretary Steven Mnuchin admitted that there is no "break-glass" emergency plan for US debt financing issues, but he also doesn’t foresee an extreme scenario where, one day, debt financing suddenly becomes impossible.

5% Used To Be A Reliable Buy Signal, Technicals Suggest Rising Breakout Risk

Since the end of 2022, every time the 30-year US Treasury yield touches or slightly exceeds 5%, it is often followed by a rapid drop in yield and a rebound in bond prices. Whether you use the iShares 20+ Year US Treasury ETF (TLT), the Direxion Daily 20+ Year Treasury Bull 3X ETF (TMF), or trade directly in the futures market, traders betting on a rally in long bonds have gotten solid returns.

This pattern has been validated multiple times in recent years, making 5% a psychological “ceiling” in the market. Seasoned ETF industry insider Matt Tuttle said he "doesn't object" to building a long position in the Direxion leveraged US Treasury ETF at current levels.

However, Jason Perz of Against All Odds Research warns against this logic. In a recent article, he pointed out that the widespread belief in 5% as an unbreakable ceiling is itself a danger.

"One of the simplest truths in technical analysis is: the more times a level is tested, the higher the likelihood it will be broken," Perz wrote. He believes traders have become path-dependent after repeatedly seeing rebounds near 5%, which could be the root of potential error.

Currently, expectations for the Fed's policy path have changed significantly—since the last rate hike in summer 2023 and the last rate cut in December 2024, rate hikes are back in discussion, fundamentally changing the macro backdrop for bond bulls.

Bull Support: Economic Downturn Might Underpin Bonds

FHN Financial macro strategist Will Compernolle takes a relatively optimistic view.

He says that even if inflation data heats up, the market’s inherent tendency to buy bonds on dips remains strong. More importantly, he believes that if the Iran conflict drags on, high energy prices will eventually substantially hinder the US economy.

"I don’t think 10-year or 30-year US Treasuries will fall further from current levels (price drop, yield rises)," Compernolle told MarketWatch. He warns that investors' complacency, as energy futures prices fall from their peak, may underestimate the economic risks ahead.

Worth noting, since the outbreak of the Iran conflict, Japan’s 30-year government bond yield has risen about 39 basis points during the same period, even slightly more than US Treasuries, showing that this round of bond market pressure is a global phenomenon.

Fiscal Concerns: No "Break-Glass" Emergency Plan

The deep anxiety in the bond market comes from long-term concerns about US fiscal sustainability. Former Treasury Secretary Henry Paulson warned in April that the US needs an emergency response plan in case demand for Treasuries collapses.

In response, former Trump administration Treasury Secretary and Liberty Strategic Capital founder Steven Mnuchin said in a Bloomberg TV interview, "Regrettably, I think there is no so-called 'break-glass' solution."

However, Mnuchin also said he does not expect a decisive crisis moment where "one day you wake up and suddenly there’s no way to finance the debt." He pointed out that a 30-year yield near 5% reflects both the inflation uncertainty brought by the Iran conflict and the rise in America’s long-term borrowing costs. He also mentioned that normalizing trillion-dollar pandemic-era spending, and eventually cutting mandatory spending, would require bipartisan support.

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