The bond market's patience is slowly wearing thin, with the 10-year US Treasury yield approaching the 5% mark.

The yield on 10-year US Treasury bonds is approaching the 5% mark, and upward pressure on long-term interest rates continues to increase, further fueling market concerns about the risks of US fiscal and monetary policies.

On Monday, the 10-year U.S. Treasury yield was 4.791%, compared to 4.78% at the close on Friday. Since the Federal Reserve began cutting interest rates last November amid persistently high inflationary pressures, the 10-year yield has risen by approximately 80 basis points. Meanwhile, the 30-year U.S. Treasury yield has already broken through 5%, rising to 5.24% on Friday, a near 20-year high.

Treasury Secretary Bessant has made several attempts to lower long-term interest rates, but with limited success. As the supply of U.S. Treasury bonds continues to increase, the market needs higher yields to attract marginal buyers, while persistently high long-term interest rates will further raise government financing costs and put pressure on the valuations of risky assets such as stocks and credit.

From the perspective of driving factors, long-term interest rates are currently facing triple pressures from sticky inflation, a relatively soft monetary policy, and an expanding fiscal deficit . What truly deserves attention is not just whether the 10-year yield can break through 5%, but whether, after breaking through this threshold, 5% will be a temporary, temporary high or a new interest rate center.

Triple pressures push up long-term interest rates

The current rise in the 10-year US Treasury yield is not driven by a single factor, but is the result of the combined effects of inflation, monetary policy, and fiscal supply.

On the one hand, US inflation has not yet truly returned to the 2% target level, but the Federal Reserve's consecutive interest rate cuts in November and December of last year have kept most financial conditions, except for real estate, relatively loose. The market is therefore concerned that if monetary policy continues to be soft, inflation may persist for a longer period, and long-term bonds will need higher yields to compensate for this risk.

On the other hand, US fiscal policy has not contracted significantly; tax cuts and increased spending continue. With the fiscal deficit widening, the government needs to issue more Treasury bonds for financing. When new supply continues to increase, and market demand cannot fully absorb it, yields need to rise to attract more funds to absorb the bonds.

Currently, the 10-year yield is about 115 basis points higher than the effective federal funds rate. This large term spread already reflects market concerns about long-term inflation, fiscal deficits, and debt sustainability.

5% is not unbearable; the real pressure comes from the size of the debt.

Historically, a 5% yield on 10-year US Treasury bonds does not necessarily mean that the US economy cannot withstand it.

For decades before the start of quantitative easing in 2008, the yield on 10-year US Treasury bonds remained above 5%, at one point approaching 15%. During the dot-com bubble, the 10-year yield was also mostly between 5% and 8%, while the US economy was still growing rapidly.

The real difference lies in the current scale of debt. The outstanding amount of US national debt has reached approximately $40 trillion. Even if the yield only rises slightly, it will gradually increase government interest payments through debt refinancing and further increase fiscal pressure.

Between 2002 and 2006, the 10-year yield briefly fell below 5% when the Federal Reserve lowered its policy rate to 1% and maintained it for an extended period, subsequently fueling a continued housing bubble. After the 2008 financial crisis, the Federal Reserve initiated quantitative easing, and the 10-year yield fell further below 4%.

Therefore, 5% is not an unbearable level for the economy. The real question is whether the market is still willing to continue to absorb the increasing US government debt at an interest rate below 5%, given the debt scale of approximately $40 trillion.

Will the "5% moment" of 2023 repeat itself?

The market is currently more concerned about whether the 10-year yield will break through 5% and repeat the market conditions of 2023.

On October 23, 2023, the 10-year yield briefly rose above 5%, reaching a high of 5.02%. However, this level quickly triggered a large amount of buying, and the yield fell by 19 basis points to 4.83% that day, and continued to decline over the next two months.

This time, the situation may be different. As yields approach 5% again, long-term funds may re-enter the market, putting temporary downward pressure on yields; however, if the fiscal deficit continues to expand, the supply of government bonds continues to increase, and the Federal Reserve maintains a relatively loose policy stance, then 5% may no longer be a clear resistance level, but gradually become a new operating center.

The 30-year US Treasury yield has already sent a similar signal. Its yield rose to 5.24% last Friday, a near 20-year high, but it did not follow the trend of quickly falling back after hitting 5% in October 2023.

Fiscal and monetary policies will determine whether the 5% growth rate can be maintained.

Whether the 10-year US Treasury yield can hold steady around 5% ultimately depends on whether there are changes in US fiscal and monetary policies.

On the fiscal side, if tax cuts and increased spending continue, the deficit and government bond supply will be difficult to contract significantly in the short term. On the monetary side, if the Federal Reserve continues to release easing signals before inflation is fully under control, market confidence in its ability to control inflation may be affected, and long-term bonds will therefore need higher yields to attract funds.

More importantly, a widening fiscal deficit means an increase in bond supply, while a relatively loose monetary policy may exacerbate market concerns about long-term inflation, both of which together push up term premiums; the huge debt stock will further amplify the impact of rising interest rates on fiscal policy.

Therefore, before there are fundamental changes in the fiscal deficit, debt size, and inflation risks, the move of the 10-year US Treasury yield toward 5% or even higher may not be a one-off market shock, but rather a process of repricing the long-term interest rate center in the United States.

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