The yield on the 30-year U.S. Treasury note is once again approaching the 5% threshold, sparking a debate among investors over the validity of this historic "buy signal." In recent years, when long-term bond yields touched 5%, betting on a bond rally was almost a guaranteed profitable trade. However, this time the situation may be different.
Since the outbreak of conflict involving Iran, U.S. Treasury yields have continued to climb, with the 30-year yield rising by a cumulative 35 basis points. Rising inflation expectations and higher real interest rates are creating dual pressures. The U.S. Consumer Price Index rose 3.3% year-over-year in March, hitting a two-year high. Concurrently, market expectations for a Federal Reserve rate hike this year are increasing, putting pressure on bond bulls.
Overnight, U.S. Treasury yields edged lower but the underlying pressure remained largely unrelieved. The 30-year yield fell by 3 basis points but continued to hover near the 5% level, while the 2-year yield declined by just 1 basis point.
A clear divergence of opinion has emerged regarding whether the 5% level can hold. Some analysts argue that repeated technical tests of the same level often signal an imminent breakout. Others maintain that economic downside risks will provide support for bonds. Meanwhile, former Treasury Secretary Steven Mnuchin acknowledged that there is no "break-glass" emergency plan for U.S. debt financing issues, although he does not anticipate an extreme scenario where the government suddenly finds itself unable to finance its debt.
The 5% level has historically been a reliable buy signal, but technical indicators now suggest increased risk of a breakout. Since late 2022, whenever the 30-year Treasury yield reached or slightly exceeded 5%, it was typically followed by a rapid decline in yields and a corresponding rebound in bond prices. Whether through the iShares 20+ Year Treasury Bond ETF (TLT), the Direxion Daily 20+ Year Treasury Bull 3X Shares ETF (TMF), or direct futures market operations, traders betting on a long-term bond rally have consistently reaped substantial returns.
This pattern has been validated multiple times over recent years, gradually establishing 5% as a psychological "ceiling" in the market. Matt Tuttle, an ETF industry veteran, stated he "wouldn't oppose" establishing long positions in Direxion's leveraged Treasury ETFs at current levels.
However, Jason Perz of Against All Odds Research cautions against this logic. In a recent article, he noted that the widespread market perception of 5% as an unbreakable ceiling for yields is itself a dangerous assumption. "One of the simplest truths in technical analysis is: the more times a level is tested, the more likely it is to be broken," Perz wrote. He believes that traders' path dependency, formed by repeatedly observing rebounds near 5%, is precisely the root of potential error.
Market expectations for the Federal Reserve's policy path have shifted significantly. After the last rate hike in the summer of 2023 and the last cut projected for December 2024, the possibility of further rate hikes has re-entered the discussion, fundamentally altering the macroeconomic backdrop for bond bulls.
Bullish support: Economic slowdown may provide a floor for bonds. FHN Financial macro strategist Will Compernolle holds a relatively optimistic view. He suggests that even with hotter inflation data, the market's instinct to buy bonds on dips remains strong. More importantly, he believes that if the Iran conflict persists, high energy prices will ultimately impose a tangible drag on the U.S. economy. "I don't think the 10-year or 30-year Treasury will move significantly lower from current levels," Compernolle told MarketWatch. He warned that investor complacency, stemming from the recent pullback in energy futures from their peaks, may be underestimating the economic risks ahead.
Notably, since the Iran conflict began, Japan's 30-year government bond yield has risen by approximately 39 basis points over the same period, a slightly larger increase than U.S. Treasuries, indicating that the current bond market pressure is a global phenomenon.
Fiscal concerns: No "break-glass" emergency plan exists. The deeper anxiety in the bond market stems from long-term concerns about U.S. fiscal sustainability. Former Treasury Secretary Henry Paulson warned in April that the U.S. needs to prepare contingency plans for a potential collapse in demand for Treasury securities.
Addressing this, Steven Mnuchin, Treasury Secretary during Trump's first term and founder of Liberty Strategic Capital, stated bluntly in a Bloomberg Television interview: "Unfortunately, I don't think there is a so-called 'break-glass' solution." However, Mnuchin added that he does not expect a definitive crisis moment where the government "wakes up one day unable to finance its debt." He noted that the 30-year yield near 5% reflects both inflation uncertainty stemming from the Iran conflict and the rise in U.S. long-term financing costs. He also mentioned that normalizing the trillions of dollars in spending from the pandemic era and ultimately cutting mandatory spending will require bipartisan support.
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