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What happens if the US 10-year Treasury yield hits 5%? Why stocks could be at risk
US 10-year Treasury yield nears 5%. Higher borrowing costs, rising US debt and stock valuations could put pressure on stocks if yields stay high.
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The US bond market selloff that began after the war with Iran has pushed the 10-year Treasury yield close to 5%. The yield has not stayed around this level for long in nearly two decades. The key question for investors now is what could happen if the yield actually reaches and stays at 5%.
Some analysts believe higher yields could hurt stocks because they increase borrowing costs for companies and consumers. But others say the picture is more complicated because higher yields can also signal a strong US economy and strong demand for investment funds, according to Reuters.
AI boom could support markets
One argument is that the huge spending on artificial intelligence and data centres is helping keep the economy and markets strong. Companies are spending heavily on AI infrastructure, which is increasing demand for capital.
In this view, higher Treasury yields are partly a sign that businesses and investors need large amounts of money. Supporters of this argument believe that if the AI boom continues, the wider stock market can also remain strong despite higher yields. This comes as the S&P 500 is close to another record high, Reuters reported.
US government debt
A different view has become stronger in recent months. Governments in wealthy countries have been increasing spending, with the US leading the trend. The US already has a long-running fiscal deficit, and that deficit has recently become wider. US government debt has also crossed the $40 trillion mark.
Investors are therefore asking whether the recent bond selloff could be an early warning of bigger problems in the future. The concern is that the US may have to pay much more to borrow if Treasury yields continue rising.
Higher borrowing costs
A 5% 10-year Treasury yield could make it more expensive for companies to borrow money. Businesses that need to refinance existing debt could face higher interest payments. Companies may also have to pay more to fund acquisitions, new projects and capital spending.
Also read: Stock market today: Dow falls 511 points as oil nears $100, US-Iran war fuels inflation fears
This could put pressure on corporate profits. The impact could be especially important as companies are already borrowing and spending heavily on AI and data centre investments, Reuters reported.
Bonds become more attractive
Higher yields are not bad for every investor. As Treasury yields rise, investors can get better returns from government debt and other types of bonds. This could encourage investors to buy debt securities instead of putting as much money into stocks.
Investment-grade corporate bond spreads are currently close to historically tight levels. This shows that investors still have confidence in large, financially strong companies and the investment outlook. But tight spreads also mean investors have less protection if credit conditions suddenly worsen, Reuters reported.
Stocks face bond competition
When Treasury yields rise, stocks can become less attractive compared with safer government bonds. This is especially important when stock valuations are already high.
Stocks have looked expensive during much of the bull market of recent years. If bond yields continue to rise, investors may start asking whether they should continue paying high prices for stocks when bonds offer better returns.
Also read: Gold price today: Why gold is falling as oil rises and Fed rate hike bets grow
High stock valuations
Albert Edwards of Societe Generale warned that the relationship between the 30-year US Treasury yield and the dividend yield on stocks is now at its highest level since the dot-com bust in 2000.
This is one reason some investors believe recent stock market gains could be fragile. Technology stocks have led much of the market rally, and many investors buy these companies mainly for their growth potential rather than their dividends.
Edwards said high valuations can make the market more vulnerable when bad news arrives. “Valuation will not in itself trigger a bear market,” Edwards said, but it can leave the market more exposed to bad news, according to Reuters.
What happens at 5%?
A 5% 10-year Treasury yield would not automatically mean a stock market crash. The impact would depend on why yields are rising and how long they stay high. If yields rise because the economy is strong and AI investment remains powerful, stocks could potentially continue performing well. But if yields rise because investors are becoming worried about US debt, government spending and borrowing needs, the situation could be more dangerous.
Higher borrowing costs, expensive stock valuations, pressure on corporate profits and weaker deal-making could all add to the risk. The biggest warning sign would be if Treasury yields rise above the pace of economic growth because that could make the US debt burden harder to manage.
Why stocks could be at risk
The main issue is that a 5% Treasury yield could change the balance between stocks and bonds. Companies would face higher financing costs. Investors could get more attractive returns from bonds. Highly valued stocks could become more vulnerable to negative news.
Government debt costs could also rise if yields remain above economic growth. Corporate acquisitions and investments could slow as financing becomes more expensive. For now, however, the strong economy and continued AI investment are providing important support to markets, Reuters reported.
