Multiple factors combined to intensify the sell-off in US Treasuries! The 5-year yield broke 5% for the first time since 2007, and the 10-year yield rose above 5.1%.

On Wednesday, the sell-off in US Treasuries intensified further, with the 10-year Treasury yield rising to 5.1%, a new high since July 2007. International crude oil prices rebounding above $100, stronger-than-expected US economic data, and signals from Federal Reserve officials indicating continued interest rate hikes have collectively driven the market to repric a "higher and longer" interest rate path. Weak demand at US Treasury auctions further exacerbated the bond market's woes.

During the midday trading session on Wednesday, October 23 (Eastern Time), the benchmark 10-year Treasury yield rose above 5.13%, an increase of about 17 basis points on the day, potentially marking its largest daily increase in four months; the 2-year Treasury yield approached 4.95%, an increase of nearly 19 basis points on the day; the 3-year yield rose by about 20 basis points to 5.0122%, and the 5-year yield broke through the 5% mark for the first time since 2007, rising by nearly 20 basis points during the session.

Long-term US Treasury yields also stabilized at multi-year highs. The 30-year US Treasury yield rose about 10 basis points during the day, approaching 5.4%, close to the high since 2007 that was just refreshed last Tuesday.

A triple whammy of economic data, oil prices, and the Federal Reserve.

The rapid rise in US Treasury yields in this round was primarily driven by renewed expectations of inflation and interest rate hikes based on US economic data.

The S&P Global U.S. Composite PMI preliminary reading for September, released Wednesday, rose to 58.4, up from 56.0 in August. Commentators noted strong growth in U.S. private sector activity, with job growth reaching its fastest pace in about four years, while price pressures also increased. Following the data release, U.S. Treasury yields jumped significantly around 9:45 a.m. ET.

The rebound in international crude oil futures on Wednesday further reinforced this logic. Brent crude oil briefly climbed back above $100 per barrel, while the ongoing tensions in the Middle East, pushing up energy prices, have become a significant risk factor for renewed inflation in the United States. Reuters also previously pointed out that oil prices and US Treasury yields have recently been highly correlated, and rising energy prices are intensifying market concerns about future inflation and interest rates.

Meanwhile, statements from Federal Reserve officials further pushed up short-term yields.

Federal Reserve Governor Barr said on Wednesday that the Fed may need to raise interest rates further to ensure inflation falls back to its 2% target in a timely manner. He pointed out that the risks to achieving the 2% inflation target have increased, while the risks to the labor market have decreased; in his view, the U.S. economy is growing strongly, the labor market remains solid, and inflation has not clearly fallen back to the target in a timely manner.

This means that the market is reassessing the future policy path following last week's Fed rate hike: if economic growth remains resilient and oil prices push inflation up again, the Fed's room for rate cuts may be further limited, and it may even need to continue tightening policy.

The five-year Treasury auction "exploded," and the decline in US Treasuries spiraled further out of control in the afternoon.

If the morning's sell-off was mainly driven by economic data, oil prices, and expectations surrounding the Federal Reserve, then the afternoon's 5-year Treasury auction became the direct catalyst for pushing yields to a new level.

The U.S. Treasury issued $70 billion in five-year notes on Wednesday, with the final yield reaching 5.033%, the highest level since 2006. This was significantly higher than the pre-issuance yield of 5.002% at the 1 p.m. New York time close, indicating that investors demanded a higher yield to purchase the bonds. This marks the 11th consecutive time that this maturity of Treasury notes has seen weak demand at auction.

The bid-to-cover ratio for this auction was 2.21 times, lower than the average of 2.33 times for the previous six auctions. The allocation to primary dealers rose to 15.8%, the highest in two years, while the allocation to indirect bidders fell to 54.3%. Following the auction, the 5-year yield quickly broke through 5%, rising nearly 20 basis points intraday, while the spread between 5-year and 30-year US Treasury yields narrowed further.

This sends an important signal: with yields already at multi-year highs, the market still lacks sufficient willingness to absorb new supply of medium-term U.S. Treasuries, and investors are demanding higher term premiums to hold U.S. government bonds.

The Wall Street Journal also pointed out that the 5-year auction was a key factor in the further decline of US Treasuries on Wednesday; at the same time, the Treasury announced that it would conduct a new round of long-term US Treasury repurchase on Thursday, purchasing up to $6 billion of 20- to 30-year Treasury bonds, but this news did not reverse the market sell-off.

It is worth noting that this is the second time recently that the Ministry of Finance has conducted long-term bond repurchase operations of up to $6 billion. The Ministry of Finance hopes to improve the supply and demand of long-term bonds by repurchasing them in the secondary market. However, given the simultaneous changes in inflation, fiscal deficit, and interest rate expectations, the market still has doubts about the ability of repurchases to lower long-term yields.

From the "5% psychological threshold" to the market starting to discuss 6%

With the 10-year US Treasury yield rising back above 5%, market focus has shifted from whether 5% will trigger market turmoil to where higher yields will actually create pressure.

A Reuters analysis on Wednesday stated that for many years, 5% has been considered a psychological threshold at which the 10-year US Treasury yield could trigger significant volatility in global financial markets. However, recent market movements are causing this threshold to lose its "ceiling" significance, with investors even beginning to discuss whether 6% will become a new resistance level.

Mike Bell, head of market strategy at BlueBay Asset Management, said that 5% is more of a psychological number than a "magic number" that automatically triggers market risk. What really matters is the relative relationship between Treasury yields and other asset valuation metrics, especially compared to stock earnings yields.

JPMorgan analysts believe that the global economic structure has changed, and investment expansion in AI, healthcare, and service companies is less sensitive to interest rates than in traditional industries. Therefore, the traditional interest rate transmission mechanism is "significantly less binding." According to JPMorgan, citing recent discussions with major investors, the true "tipping point" for the stock market may have shifted from 5% to the 5.5% to 6% range.

However, this does not mean that high yields have no impact on risky assets.

Paul Jackson, head of global asset allocation research at Invesco, pointed out that the average yield on 10-year US Treasury bonds over the past 12 months is currently around 4.34%, which is still some distance from the 4.72% average level he calculated when global stock markets began to come under pressure. However, he has already begun to reduce his equity allocation and shift some of his holdings to government bonds in order to take advantage of the current higher bond yields.

Premier Miton's Chief Investment Officer, Neil Birrell, believes that the stock market has not yet experienced a significant crash, possibly because investors have not fully incorporated the long-term risk-free rate of over 5% into their future earnings and valuation models. Once valuations are recalculated, the impact of high interest rates may become more pronounced.

It's not just the "interest rate trade"; fiscal and supply pressures are also pushing up long-term bond yields.

More noteworthy is that this round of rising US Treasury yields is no longer simply a "Fed rate hike trade".

Reuters analysis suggests that if the 10-year yield moves further toward 6%, it could indicate persistently high inflation expectations, growing concerns about the sustainability of US fiscal policy, or a market belief that interest rates will remain high for many years—or it could be the result of all three factors combined.

US fiscal pressure is becoming an increasingly unavoidable variable for long-term US Treasury bonds. The US government debt has already surpassed $40 trillion, and the Treasury still needs to issue large amounts of Treasury bonds to meet its financing needs. At the same time, the AI infrastructure investment boom is driving up corporate bond issuance, leading to competition for long-term capital between the government and businesses.

PIMCO recently argued that there is currently insufficient evidence to prove that large-scale bond issuance by AI companies has directly "crowded out" demand for US Treasury bonds. However, if AI capital expenditures continue to expand, they may push up long-term equilibrium real interest rates by increasing savings and investment demand.

Therefore, Wednesday's market performance was more like a concentrated pricing of multiple factors: strong economic data raised expectations for real interest rates, oil prices returning to $100 intensified inflation concerns, hawkish comments from the Federal Reserve lowered expectations for rate cuts, and the weak 5-year Treasury auction revealed the market's pressure to absorb new supply under high yields.

In this environment, the 10-year yield exceeding 5% is no longer just a psychological threshold, but is becoming an important market variable for reassessing US stock valuations, corporate financing costs, and US fiscal financing pressures.

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.