"Is the Gate of Misfortune Opening? 30-Year Treasury Yield Surpasses 5% Temporarily, Wall Street Warns Asset Bubble Might Come to an End"

In some circles on Wall Street, the most intense debate at the moment is not about the tech stock bubble or oil prices becoming the new normal at $100 per barrel, but whether the 30-year US Treasury bond yield will continue to break through the 5% mark. The 30-year US bond yield, which determines the long-term borrowing costs of the US government, briefly surpassed this level this week, hovering near a twenty-year high and slightly below the peak at the end of 2023 - when the Federal Reserve was still trying to contain post-pandemic inflation. This shift is primarily due to market concerns that the oil price shock caused by the Middle East conflict could once again lead to a spiral in consumer prices. But other factors are also at play. A massive fiscal deficit means the US will continue to issue large amounts of debt - its debt size has already exceeded 100% of annual GDP. Additionally, despite President Trump's constant pressure on the Fed to lower rates, traders are betting that even if Trump's personally selected Fed chair nominee Kevin Warsh takes over, the Fed may ultimately raise rates next year instead of lowering them. Some are even starting to question the convenience of holding US bonds as a traditional safe-haven asset. High bond yields will have implications for global markets, economies, and politics, as higher costs for credit cards, mortgages, and corporate loans will squeeze consumers and businesses, dragging down economic growth. Gennadiy Goldberg, head of US rate strategy at TD Securities, said that a 5% yield is a "psychological threshold that often rekindles market concerns about 'bond vigilantes' and future higher rates." The 30-year US bond yield tests the 5% mark again The bond market's trend has continued to vex forecasters since the end of the pandemic. In 2022, with the Fed raising rates, US bonds tumbled. Many investors at that time believed that as monetary tightening pushed the economy into recession, bonds would rebound, but they were "slapped in the face" by the unexpectedly strong performance of the US economy. Even if the Fed starts cutting rates by the end of 2024 - and Trump's trade war casts a shadow over the outlook - US bond yields have not fallen, in part because traders had already factored these factors in. In fact, since then, the 30-year US bond yield has risen by nearly one percentage point, the largest increase since the Fed's easing cycle in the 1980s. Brij Khurana, portfolio manager at Wellington Management, said, "The 30-year US bond yield around the 5% level seems quite stubborn, and we will watch to see if this level can be sustained. The bond market is not only reflecting inflation pressure caused by war, but also the strong growth of the US economy in recent months." Since the end of February, this war has quickly overturned market prospects, leaving investors unsure whether high oil prices will fall after the war ends or be enough to reignite inflation and ultimately end the US economic expansion. US inflation expectations closely related to oil prices As the Strait of Hormuz remains closed and oil prices remain around $100 per barrel, traders are betting that policymakers in the UK and Europe will have to start raising rates to curb the oil price shock. In the US, just three weeks ago, the overnight index swap market expected a 43% chance that the Fed would cut rates by March next year, but now shows over a 10% chance of a rate hike. Even though bond yields have slightly receded since Monday due to renewed hopes for peace agreements in the Middle East, these expectations are largely maintained. Swap markets erase Fed rate cut bets, starting to reflect rate hike possibilities John Canavan, analyst at Oxford Economics, said, "Even if the Strait of Hormuz reopens, the initial easing rebound may be very brief. It will take quite a long time for oil production to return to normal." It is worth noting that the US is not the only country facing rising borrowing costs. A strategist at the National Bank of Canada pointed out that the average yields of 10-year and 30-year government bonds in G7 countries reached a 17-year high at the end of April. BlackRock Investment Institute also claims, "The era of high yields will persist for a long time." Although US bond yields remain high, AI spending frenzy and strong corporate profits overshadow geopolitical risks in the Middle East and the slowdown in the job market, and the US stock market continues to rise to record highs. However, Michael Hartnett, chief strategist at Bank of America and known as "Wall Street's most accurate analyst," warned that if the 30-year US bond yield continues to break through 5%, it will be the "beginning of the door of doom opening." He cautioned that asset bubbles often end with a sharp rise in yields. A key question for traders is whether the current situation will repeat the scenario at the peak of the Fed's rate hike cycle at the end of 2023 and the market collapse triggered by Trump's tariffs last year. In both of these events, the 30-year US bond yield briefly touched 5%, and investors who bought at the peak earned hefty returns. If a US-Iran agreement leads to a fading oil price shock, or economic stagnation rekindles market bets on a Fed rate cut, a similar situation may arise again. Krishna Guha, vice chairman of Evercore ISI, wrote in a client report, "We believe the market pricing is still too hawkish. If an agreement is reached and oil prices fall, it means the Fed rate cut is only delayed, not canceled." The 30-year US bond yield was trading around 4.96% on Friday morning. Cameron Crise, macro strategist at MLIV, said, "Although the 30-year US bond yield has fallen back below 5%, it is still very high by recent historical standards, especially considering the Fed's policies in recent years. If this yield wants to stay around this level, the Fed may need to truly raise rates." Ed Al-Hussainy, portfolio manager at Columbia Threadneedle Investments, is one of the investors who recently bought ultra-long US bonds, trying to capture this opportunity, but he still has concerns. He said, "I am very nervous. The US economic growth story is better than it was six months ago, and stronger than market expectations at the beginning of the year, which raises the bottom level of rates." Data shows that the US economy accelerated its growth at the beginning of the year, with GDP after inflation adjustments growing at an annual rate of 2% in the first quarter. The market expects Friday's release of the April employment report to show 65,000 new jobs, accelerated wage growth, and a stable unemployment rate. Al-Hussainy added that one risk is that the Fed may cut rates early because the impact of their expected high oil prices will be temporary. He believes that this will make the bond market uncomfortable, as it means the Fed may be prepared to tolerate inflation persistently above the 2% target, "which would be a problem for long-term bonds." Furthermore, the high rate levels have become a significant source of frustration for Trump ahead of the midterm elections in November. He has repeatedly criticized Powell for not lowering borrowing costs faster. In early 2021, US Treasury Secretary Yellen said that the government's fiscal plan would lower bond yields by controlling the deficit, as this would reduce the supply of US bonds and enhance investor confidence. However, the uncertainty brought by tariff policies - which raised import prices - has kept US bond yields high, and the Fed has become more cautious. The US public debt has increased by over $2 trillion, approaching $31 trillion, exceeding the annual total output of the US economy. The Congressional Budget Office predicts that Trump's tax cuts will push this ratio to 120% of GDP in the next decade, surpassing the historical record during World War II. Alicia Garcia-Herrero, chief economist for the Asia-Pacific region at Natixis, said, "Many of the problems of high interest rates and high inflation can be traced back to Trump and his policies. There is a great irony in all this that cannot be ignored."