US 30-Year Treasury Yield Tops 5% on Stubborn Inflation

The U.S. 30-year Treasury yield climbed above 5% for the first time since July, as persistent inflation and a war-driven surge in oil prices forced traders to price in the possibility of a Federal Reserve interest-rate hike next year.

"A yield of 5% is a psychological threshold that tends to reignite worries of bond vigilantes and higher interest rates going forward,” said Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities.

The move in the long bond, which briefly touched 5.04 percent, was mirrored by shorter-dated debt, with the 10-year Treasury yield rising to 4.5 percent, its highest since July. The selloff in government bonds followed back-to-back reports showing wholesale and consumer inflation accelerated in April, fanned by oil prices holding around $100 a barrel amid the continued closure of the Strait of Hormuz.

The sustained rise in "risk-free" rates presents a direct challenge to the record-setting rally in U.S. stocks, increasing the allure of bonds and raising borrowing costs for corporations and consumers. Bank of America strategist Michael Hartnett warned clients that a sustained 30-year rate above 5% is a point where “the door to doom starts to open” for risk assets.

Fed Bets Inverted

The shift in bond markets reflects a rapid repricing of monetary policy expectations. Just three weeks ago, overnight-indexed swaps signaled a 43 percent likelihood of a Fed rate cut by March 2027. Those odds now show a greater than 10 percent chance of a rate hike in the same period, a dramatic reversal driven by fears that higher energy costs will entrench inflation.

“The conversation for new rate hikes may be opening, but first and foremost the Fed is going to remove some of that easing bias from the statement and reaffirm their positions on the sideline,” Lindsey Piegza, chief economist at Stifel, told Bloomberg Television.

The pressure is mounting on incoming Fed Chair Kevin Warsh, who was confirmed Wednesday. Despite a resilient U.S. economy, which grew at an annualized 2 percent in the first quarter, the combination of sticky inflation and rising government debt is complicating the central bank's path. The U.S. debt held by the public has swelled by more than $2 trillion to nearly $31 trillion, surpassing the size of the economy’s annual output.

Stocks Face a Headwind

Despite the bond market turmoil, the S&P 500 has rallied to record highs, buoyed by strong corporate earnings and an AI-driven spending boom. However, the ascent of long-term yields threatens that momentum. Higher yields on government bonds, considered risk-free, make equities less attractive by comparison, particularly high-growth technology stocks whose valuations are sensitive to interest rates.

“The back-end seems relatively sticky at the 5% level and we’ll see whether that holds,” said Brij Khurana, a portfolio manager at Wellington Management. “The bond market is reacting to the inflation pressures of the war, but also to the substantial growth that we’ve gotten in the last few months.”

While some investors, like Ed Al-Hussainy at Columbia Threadneedle Investments, have been buying the longest-dated Treasuries to capture the higher yields, he admits to being "very nervous." The risk, he said, is that the Fed cuts rates prematurely, signaling a tolerance for inflation above its 2 percent target and jeopardizing the value of long-duration bonds.

This article is for informational purposes only and does not constitute investment advice.