【TMGM Financial Recap】U.S. Treasuries Suffer A Bloodbath! The 5-Year U.S. Treasury Yield Has Broken Below 5% For The First Time In 19 Years

This round of selling was not triggered by a single point. During the European session, Iranian President Pezeshiziyan stated at the general debate of the 81st United Nations General Assembly that Iran is willing to negotiate but will not accept force from force, sanctions, or military threats to make concessions, and will not reopen the Strait of Hormuz until conditions are met. Previously, Brent crude oil, which had fallen below $100 due to Saudi Arabia's resumption of east-west pipeline operations and possible US-Iran negotiations, turned from a decline to an increase, closing at $103.08, an increase of 3.86%; WTI closed at $92.16. The strong linkage between oil prices and US Treasury yields in recent months has thus restarted.

After the New York session opened, S&P Global released the preliminary US September composite PMI reading to 58.4, up from the previous 56.0 and the market expectation of 55.3, the highest since July 2021; Among sub-items, the services PMI preliminary was 58.7 and manufacturing 57.0, both significantly above expectations, while the new orders index jumped from 55.2 to 58.2, the fastest since March 2022. Based on historical data, this reading corresponds to about 5% annualized economic growth, close to the Atlanta Fed's 5.1% GDP tracking estimate.

The third issue comes from the Federal Reserve. Governor Michael Barr stated in a speech at a Chicago Fed meeting, "The risk of achieving inflation targets has increased, while risks in the labor market have diminished," and said "further policy adjustments are likely necessary" to ensure inflation returns to target levels in a timely manner. Last week, the Fed raised its policy rate to 3.75%–4.00%, and the dot plot shows most policymakers expect another rate hike within the year.

Meanwhile, the U.S. Treasury issued $70 billion in five-year Treasury bonds that day, with a winning yield of 5.033%, significantly higher than the pre-offer yield of 5.002% at the time of bid closing; The bid-to-cover ratio was 2.21, lower than the average of the previous six rounds of 2.33; The allocation ratio for primary dealers rose to 15.8%, the highest in two years, while the allocation ratio for indirect bidders dropped to 54.3%. This marks the 11th consecutive time in the five-year auction with weak demand, and the second worst since records began in 2018. The winning bid rate of 5.033% is the highest since 2006.

With yields at multi-year highs, investors still demand higher term premiums to absorb medium-term supply, which speaks volumes more than the absolute level of yields. On that day, the 5-year yield rose nearly 20 basis points intraday, the largest single-day gain since 2024, surpassing the 4.99% seen at the peak of the 2023 rate hike cycle.

5% Is Losing The Meaning Of The "Ceiling."

What deserves more attention is the shift in the narrative itself. Reuters pointed out that for years, 5% has been seen as a psychological threshold for the 10-year yield to trigger global market turmoil, and this threshold is "turning from the ceiling into a signpost," with investors beginning to discuss 6%. Mike Bell, Head of Market Strategy at BlueBay Asset Management, believes that 5% is more of a psychological figure, with the key being the relative relationship between U.S. Treasury yields and stock earnings yields, which is approaching a turning point.

JPMorgan judges that investment expansion in AI, healthcare, and services is less sensitive to interest rates than traditional industries, and that traditional interest rate transmission mechanisms are "clearly less constrained," meaning the real tipping point for stocks may have shifted to the 5.5%–6% range. Paul Jackson, Head of Global Asset Allocation Research at Invesco, estimates that the threshold for global stock market pressure is when the 10-year average yield rises to 4.72% and continues to rise; The current average is about 4.34%, and he has begun reducing stock holdings and shifting to government bonds.

History provides two references. The last time the 10-year yield broke above 5%, the MSCI Global Equity Index was subsequently halved, just before the global financial crisis; Nearly a decade earlier, a yield close to 6.8% burst the dot-com bubble.

The pressure has already spilled over. On the day, the three major U.S. stock indexes all closed lower: the Dow Jones down 0.68%, the S&P 500 down 0.75%, and the Nasdaq down 1.13%; The average 30-year fixed mortgage rate rose to 7.12%, the highest since May 2024. Emerging markets were also hit, with EM bond funds recording the largest outflow in months last week.

According to CME's "FedWatch FedWatch," the probability of a 25 basis point hike at the October meeting is 69.7%, while the probability remains unchanged at 30.3%; The probability of a cumulative 50 basis point hike in December is 54.8%. The interest rate swap market has fully factored in three rate hikes in the coming year, with some hedging positions even reflecting the possibility of a fourth rate. The next validation nodes are concentrated this week: on September 24, New York Fed President Williams, Richmond Fed President Barkin, and other officials, as well as initial jobless claims and August new home sales; The longer end depends on the October policy meeting and the Treasury's subsequent issuance structure.