Strategists are sounding the alarm that US Treasury bonds have entered a perilous phase. A sharp surge in long-term bond yields is raising concerns that persistent inflationary pressures may begin to spill over into the stock market. The sell-off in US Treasuries intensified on Tuesday, with the yield on the 30-year bond reaching its highest level since 2007.
HSBC Holdings PLC notes that US Treasuries have officially moved into a danger zone. The combination of soaring long-term yields, stubbornly high inflation, and a market consensus expecting the Federal Reserve to maintain a hawkish stance on interest rates is gradually transmitting negative sentiment to equities and other risk assets. The selling pressure on US bonds escalated on Tuesday. The yield on the 30-year Treasury breached 5.19%, marking a peak not seen since 2007. Meanwhile, the yield on the benchmark 10-year Treasury approached 4.69%. As of 9:10 PM Eastern Time, the 30-year Treasury yield had dipped slightly by less than one basis point to 5.184%, while the 10-year yield stood at 4.667%. Strategists at the bank wrote in a report on Tuesday evening, "US Treasuries are now firmly in the danger zone. Once the 10-year yield reaches this zone, it exerts pressure on virtually all asset classes." They warned that if the market further revises up its expectations for the terminal interest rate, Treasury yields could become entrenched in this danger zone, likely triggering a short-term downturn in risk assets. The bank stated that the current resilience in the market is primarily due to three factors: strong corporate earnings growth momentum; asset valuations had already undergone some correction prior to the escalation of tensions involving Iran; and most investors still believe the Middle East conflict will primarily impact oil prices. Steve Sosnick, Chief Strategist at Interactive Brokers, believes this recent movement in Treasury yields carries significant psychological impact for the market, particularly as the yield on a 30-year bond auction surpassed the 5% threshold for the first time since 2007. Sosnick noted that the current market situation represents a yellow alert, not yet reaching a red crisis level. However, he cautioned that if the 10-year yield hits 4.65% and the 30-year yield rises to 5.5%, the market could experience more severe volatility. Ian Lyngen, a strategist at BMO Capital Markets, believes the continued rise in yields may spill over into the stock market. He predicts that if the 30-year Treasury yield climbs to around 5.25% in the coming weeks, equity valuations will face sustained downward pressure.
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