To The Moon

As US Treasury yields keep climbing past one record after another, a realization is settling in more deeply across Wall Street and Washington: this may be more than just a bond-market downturn — it could be a fundamental regime change.

Energy shocks, mounting debt burdens and the AI spending boom have combined to drive the government's borrowing costs higher — from $100-a-barrel oil and the artificial-intelligence investment surge, to widening US budget deficits adding to a record $40 trillion debt load — all against a backdrop of a Federal Reserve determined to cool inflation that has run well above target for years.

The selling pressure intensified this week as energy prices surged anew and data showed US businesses are humming along, giving an already hawkish central bank more reasons to keep raising interest rates. Now, nearly all US benchmark yields are hovering around or above 5%, with five-year Treasuries surpassing that threshold on Wednesday for the first time since 2007.

"We are in a new regime," said Samuel Martinez, portfolio manager at Vanguard, the investment giant that oversees over $13 trillion globally. Central bankers' focus on inflation has traders pricing in multiple hikes, he said.

Because Treasuries serve as a global bellwether for debt costs, the rise in yields has immediate, real-world consequences for consumers, corporations and governments, with the potential to send the economy skidding as borrowers feel the squeeze and upend the record run in US equities.

Zooming out, the latest surge adds to a years-long ascent back from the low-rate era of the financial crisis and pandemic, which has not only heaped more pain on bond investors already nursing losses, but also leaves a new generation on Wall Street facing a world where 5% is once again the norm, if not the floor.

"The prior years were the anomaly," said Vincent Reinhart, chief economist and macro strategist at BNY Mellon who previously had a long career at the Fed.

It's not just the US. Other leading economies are grappling with similar issues including Iran war-related energy disruptions and high levels of borrowing that has fed on itself all year as yields have climbed.

On Thursday, Japan's government yields jumped to levels last seen in 1996 as the market reopened after a three-day break and other global markets were also hit hard.

All told, the average yield on government debt worldwide sits just shy of 4%, the highest since 2007, Bloomberg's Global Aggregate Treasuries index shows. For the $32 trillion US Treasury market, that average yield is 5.05%, within sight of 2023's high of 5.12% and the twin peaks set in 2006 and 2007.

The march higher in yields is particularly unwelcome for a White House under President Donald Trump that has consistently argued for lower yields to spark relief for homeowners and borrowers, and railed against Fed policy. Efforts by Treasury Secretary Scott Bessent to cap long-dated yields through increased buybacks are broadly seen as having little effect, and may even, some say, be adding to instability.

With the US midterm elections looming large, and affordability a growing concern across the country, the yield surge is quickly becoming a political issue. Mortgage rates are now hovering above 7%, while Federal Reserve Bank of New York data show credit-card and auto loan delinquencies trending higher in recent years, revealing a pain point for many voters.

"This is a bad news story for anyone with credit card debt, auto loans, who wants to get a mortgage," said Douglas Holtz-Eakin, president of the right-leaning American Action Forum and a former director of the Congressional Budget Office. "They're on the wrong side of these transactions, there's no way to sugar coat this."

Market watchers say yields are where they are for a reason, and the fundamentals prove it. With the US economy expanding at more than 6% in nominal terms and a budget deficit around 5.5% of gross domestic product, according to data compiled by Bloomberg, the current environment is justified, they say.

Some see yields rising even higher, with more than half of 173 respondents in a Bond Yields at 6% Will Become Reality This Year: Markets Pulse this week predicting US 30-year yields will reach 6% before the end of the year, a level not seen since the dot-com bubble burst.

Of course, for savers and investors looking to put money to work now, yields at 5% offer a compelling source of income.

"You would sign me up for the yield dynamic we're in any day of the week over what we experienced post-financial-crisis, with a zero-rate environment," Michael Hans, chief investment officer at Citizens Wealth, which oversees over $65 billion, said in an interview last week. "Investors are finding opportunities that years ago they did not."

Bessent, for his part, has consistently suggested the selloff in Treasuries in recent weeks has been a byproduct of higher oil prices, which he argues are a temporary phenomenon tied to the Iran conflict. Once the war is over, the world will, if anything, have a glut in energy supplies, which will take prices and yields down, he argues.

Still, some investors counter that the spike in energy prices is just one of many risks — and they want to be compensated for them. Front and center are the unknowns around the Fed's rate path and how it might play out for the economy and markets.

After last week's policy meeting that sealed the first rate hike in over three years, the messaging from the Fed remains stern. Fed Governor Michael Barr this week said further rate hikes will likely be needed to slow prices while Chicago Fed President Austan Goolsbee warned that the road back to the central bank's 2% inflation target won't be without pain.

Swaps that track future Fed meetings now fully reflect three quarter-point hikes over the next year, with significant hedging for a fourth increase. If realized, that would take the central bank's target rate into a range of 4.75% to 5%.

Chairman Kevin Warsh has made a virtue of not sending signals to bond investors about the Fed's policy intentions. That leaves traders fixated on inflation-related factors such as the energy disruptions from the Middle East conflict, and rising input costs in the broad economy. It also heightens the risk that the Fed could keep tightening to a point where the economy and equities take a big hit, as seen by late 2000, when the funds rate peaked at 6.5% earlier that year.

Speaking last week at a Doubleline Capital event in New York, Jeffrey Gundlach said the unspoken message from Warsh is that if we don't get to 2% on inflation, then "he is a failure."

Selling pressure in Treasuries gathered pace late Thursday in New York. Now, several Treasury benchmarks are some 10 to 15 basis points shy of breaking important historical levels that would take yields to where they were back in 2000 for five-year maturities, and 2002 for 10- and 30-year tenors.

"I'm still of the view that rates are moving higher until something breaks," said Jack McIntyre, portfolio manager at Brandywine Global Investment Management.