Pimco warns: Hedge funds forced to sell to cut losses; US 10-year Treasury yield may break 6%!

Pimco, the world's largest bond fund, has warned that the yield on the 10-year U.S. Treasury note risks breaking through 6%, which would be the first time the benchmark yield has reached that level in 26 years.

In an interview with the Financial Times, Pimco's Chief Investment Officer, Dan Ivascyn, stated that a significant further rise in the 10-year US Treasury yield from its current level of 5.29% is "achievable." He pointed out that technical selling pressure, driven by leveraged investors such as hedge funds being forced to liquidate positions after suffering continuous losses in the $32 trillion market over the past few weeks, is one of the key factors pushing yields higher. Ivascyn also warned that if the 10-year Treasury yield rises to 5.5% or higher, risk assets such as stocks and corporate bonds will experience a "quite significant decline."

This round of yield increases has begun to impact the real economy. Data shows that in the week ending October 8, the average 30-year fixed mortgage rate in the United States rose to 7.4%, up 12 basis points from the previous week, reaching the highest level since 2023, further increasing pressure on American households with only weeks left before the crucial midterm elections.

Stop-loss selling creates a negative cycle.

Ivascyn's warning echoes widespread concerns among investors in the market recently. Several investors have previously warned that the US Treasury market is caught in a "vicious cycle"—a sustained wave of selling pushes yields to new highs, forcing more market participants, such as real estate investment trusts, to follow suit and further exacerbate selling pressure.

Ivascyn explicitly pointed out that a significant portion of recent market activity is directly related to "negative technical factors" and "stop-loss operations by platform hedge funds and other leveraged investors." He stated that from a short-term trading perspective, yields exceeding 6% are "certainly possible."

The yield on 10-year US Treasury bonds is currently at its highest level since the beginning of this century. Driving factors include inflation concerns stemming from Trump's Iran war, the massive debt financing boom among AI companies, and market expectations of strong US economic growth. An inflationary environment is particularly unfavorable for bonds because they provide investors with a fixed income stream.

Risky assets are under pressure, and concerns are emerging in the private equity market.

Ivascyn warns that further increases in US Treasury yields will impact risk assets. While US stock indices remain near historical highs, the negative impact of high yields on some companies is already emerging – this month, the borrowing costs for bonds issued by companies with the lowest credit ratings rose to 17%, the highest level since May 2020, due to both rising US Treasury yields and investors demanding higher risk premiums.

Outside the public market, Ivascyn predicts that higher US Treasury yields will also trigger problems "slowly" in the private market, with the commercial real estate sector being particularly vulnerable. He points out that the sector has "a large amount of still fragile capital structures and weak fundamentals."

High yields or self-correction: Opportunities emerge in overseas bond markets.

However, Ivascyn also pointed out the inherent checks and balances on rising yields. He believes that as yields continue to rise, investors will gradually shift more asset allocation to US Treasuries to lock in higher returns, which will become a "limiting factor for further yield increases." This week's auctions of US 10-year and 30-year Treasury bonds both saw strong demand, providing initial signs of this trend.

Regarding overseas markets, Ivascyn believes there are more attractive alternatives. He stated that Pimco is "not as concerned as some are about the US's ability to sustain its current deficit levels in the long term," but emphasized that "there's no need to hold only US bonds." He cited the investment value of Australian "high-quality credit" bonds, noting that despite the UK facing "its own challenges," its bond yields remain higher than those of the US. The Canadian and German markets—especially when denominated in US dollars—also offer "very attractive yields and better initial fiscal positions."

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