Treasury Yield Hitting 5% Raises Concerns for Stock Market
Traders are predicting a surge in the 10-year Treasury yield to 5% within five weeks, according to Bloomberg. Historically, yields this high have triggered stock sell-offs.
The rising yields reflect fears of escalating US debt and inflation under the Trump administration. An options trade betting on a 5% yield in the coming weeks has garnered attention.
If successful, this trade could yield millions for the trader who anticipated the yield increase. However, it could also indicate a downturn in the stock market. The 5% threshold has historically disrupted stock rallies, reflecting reduced trader confidence and increased uncertainty.
Government bonds become more attractive relative to stocks when yields rise, as they offer a safer investment. The 10-year note last breached 5% in October 2023.
Growing concerns about Washington's debt have contributed to the bond market sell-off. Rising debt burdens were also a factor in January's yield spike, reaching the highest level since 2023.
Trump administration policies have intensified inflation fears, further driving up yields. The Federal Reserve's first rate cut in September 2022 led to a steady rise in yields, despite falling borrowing costs. This suggested that the bond market anticipated higher inflation and interest rates in the future.
A recent surge in the consumer price index sent the 10-year yield over 4.6%. Friday's options trade is not the first, as last week saw a purchase of over 100,000 options contracts betting on similar yields.