Despite a disappointing non-farm payrolls report, US Treasury bonds remained stable: Wall Street's real fears have materialized.

US nonfarm payrolls increased by only 29,000 in September, far below the expected 90,000, but the 10-year US Treasury yield rebounded quickly by more than 10 basis points to 5.30% after a brief dip, staging a V-shaped reversal.

A disappointing jobs report lowered expectations for short-term rate hikes but failed to shake long-term yields—Wall Street’s real anxiety has shifted from the next rate hike to a more pressing question: how long can the economy hold out if borrowing costs refuse to fall?

A frozen real estate market, increasingly punitive consumer credit, and high financing costs for borrowers with weak creditworthiness—the cracks in the 5% interest rate environment have already appeared, only to be masked by the stellar performance of leading stock indices.

Non-farm payrolls data was disappointing, and the bond market only gave it a half-day boost.

Data released by the U.S. Labor Department on Friday showed that nonfarm payrolls increased by only 29,000 in September, below the lower end of all forecast ranges; August's figure was revised down from 162,000 to 133,000, the unemployment rate rose slightly to 4.2%, and the year-on-year growth rate of average hourly earnings slowed to 3.0%.

Subsequently, the yield on the two-year U.S. Treasury note fell 10 basis points to 4.69%, S&P 500 futures rose 0.8%, and Nasdaq 100 futures rose 1.1%. CME Group's FedWatch tool showed the probability of an October rate hike fell from 22% to 17%. Jefferies' chief U.S. economist, Thomas Simons, stated that this data "should be the final nail in the coffin for an October rate hike."

But the turnaround came quickly. The 10-year yield rebounded rapidly from its daily low of 5.16%, reaching 5.30% in the afternoon, approaching the 5.34% high set on Thursday, the highest level since 2002. For the week, the 10-year yield rose by about 12 basis points, marking its fifth consecutive week of increases; while the 2-year yield fell by about 3 basis points for the week, ending its previous six-week winning streak.

The divergence between short-term and long-term trends points to the same conclusion: weak non-farm payrolls have lowered expectations for short-term interest rates, but inflation, fiscal supply, and term premiums are still firmly supporting long-term yields.

Economists generally believe the data distortion stems from seasonal factors. According to Reuters, this year's Labor Day holiday falls at the end of the month, historically leading to lower statistics. Initial jobless claims remain near a 57-year low, with healthcare, construction, and manufacturing maintaining net job growth and no signs of large-scale layoffs. Charles Tan, Chief Investment Officer of Global Fixed Income at Centennial Investments, commented:

"This marginally provides more reason for the Fed to hold rates steady. But conversely, just one or two pieces of positive inflation data could send the market back to a hawkish stance."

K-shaped divergence under 5% interest rate

Stock investors are most concerned about the speed at which yields rise, but the economy must ultimately bear the absolute height at which yields remain.

"There's a huge disconnect between the real economy and AI/capital expenditure," said Brad Conger, chief investment officer at Hirtle & Co. Strong earnings and a wave of AI spending kept major stock indexes near record levels—Nvidia hit an all-time high on Friday, pushing its market capitalization close to $6 trillion, and the Nasdaq 100 closed at a record high. But below the indexes, market breadth has narrowed. Banks, industrials, and utilities weakened, with the KBW Bank Index falling 2.78% for the week. Of the three major indexes, only the Nasdaq rose 0.45% for the week, the S&P 500 fell slightly by 0.27%, and the Dow Jones Industrial Average fell 1.26%.

"I don't think there's a tipping point where everything suddenly collapses, but we're already in a painful phase for some industries," Conger said, pointing to real estate, automobiles, consumer loans, and credit cards.

Nancy Tengler of Laffer Tengler Investments is relatively optimistic: "Sometimes rising yields are a good thing." She believes that if companies can borrow at a 5% cost and generate 15%-20% returns, "they should do it all the time." Michael Alfaro, a fund manager at Gallo Partners, points out that private sector spending on data centers shows no signs of slowing down, and AI and aerospace-related companies are far more tolerant of high interest rates than traditional industries.

The real risk: How long will high interest rates last?

The current economy still has a buffer against high interest rates.

Max Gokhman of Franklin Templeton points out that most U.S. homeowners have fixed-rate mortgages with an average interest rate of about 4%, which has shielded them from the shock of new interest rates in the short term; only about 13% (about $570 billion) of U.S. non-financial corporate debt will mature in 2027. The estimated $300 billion in AI-related financing is primarily from investment-grade companies with ample capital and low sensitivity to funding costs.

However, cushioning pads have an expiration date.

"5% isn't the last straw that breaks the camel's back, but it's another heavy sack on the weary hump, and without unloading some of that weight, collapse is only a matter of time," Gokhman said. "We've already seen the economic pressure in the latest jobs data and sentiment indicators."

A more dangerous scenario is that inflation continues to push up yields while growth weakens simultaneously. Conflicts between the US, Israel, and Iran have driven up energy prices, with diesel prices hitting record highs; declining refining capacity in the Middle East and Russia is creating new pressure on refined product supplies—the G7 announced on Friday, through the IEA, the release of 100 million barrels from reserves, including diesel, causing WTI crude oil to fall by more than 5% at one point during the session. Continued tariff frictions are also dampening companies' willingness to expand production, with an ISM survey showing manufacturers' growing concerns about the Canadian trade dispute.

"Then stocks and fixed income could fall simultaneously, repeating a scenario similar to 2022, with commodities becoming the only safe haven," Gokhman said. He and his team have added commodity allocations to their portfolios to hedge against this possibility.

Pressure is also spreading in global bond markets. The spread between French and German 10-year government bond yields widened to 150 basis points on Friday, reaching its widest level since the 2012 European debt crisis.

A non-farm payroll report can temporarily lower short-term interest rate expectations, but long-term yields remain unchanged—the real test of the 5% era is how long it will last.

Risk Warning and DisclaimerInvesting involves risk; please exercise caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Any investment decisions made based on this information are at your own risk.