Five pressure points to watch as Treasury yields creep toward 5%

The U.S. bond selloff has pushed the 10-year Treasury yield toward 5%, raising concerns about how much higher borrowing costs markets can absorb without hurting corporate spending, dealmaking and stocks, according to Reuters. The yield touched 4.8% on Monday, its highest since October 2023, but strong economic growth and heavy AI-related investment are helping offset some of the pressure. Here are five areas to watch as yields move closer to 5%.

Higher Treasury yields raise the cost of refinancing debt, funding acquisitions and financing capital expenditure. That could become a problem as companies increase spending on artificial intelligence and data centers, potentially putting pressure on earnings.

Still, higher yields can make corporate debt more attractive to investors. Investment-grade spreads remain near historically tight levels, Reuters reported, reflecting confidence in large companies and the investment outlook. But tight spreads also leave investors with less protection if credit conditions deteriorate.

Higher bond yields are also making stocks face tougher competition. Equities have traded at elevated valuations during the bull market, and rising Treasury yields could make fixed income increasingly attractive.
Albert Edwards of Societe Generale pointed to the ratio of the 30-year Treasury yield to the stock dividend yield, which he says is at its highest since the dot-com bust of 2000, Reuters reported.
"Though valuation will not in itself trigger a bear market, it most certainly leaves the market more vulnerable to ‘bad’ news," Edwards said.

For now, the U.S. economy is still growing faster than the government is borrowing. Nominal year-on-year GDP growth rose from 6.07% in the first quarter to 6.56% in the second, Reuters reported, keeping borrowing costs below the economy's growth rate.

That gives Washington some room to carry a larger debt burden. But if Treasury yields rise above economic growth, interest costs could begin compounding faster than government revenue, making the debt harder to sustain.

The rise in long-term yields has been driven predominantly by real rates, rather than inflation expectations, according to Gennadiy Goldberg, head of U.S. Rates Strategy at TD Securities USA.
The Treasury's long-term real rate average has risen to 2.92% this week from 2.55% at the end of last year, Reuters reported.
"The recent rise in long-end Treasury yields has been driven predominantly by real rates," Goldberg said.

Higher borrowing costs are also changing the mood around mergers and acquisitions. Reuters reported that investors and bankers are increasingly concerned that deals could take months longer to complete, while buyers are becoming less willing to pay up.
"The cost of doing everything is becoming more expensive and that's going to affect deal making," one investor said.
The approach toward 5% is therefore less about the level itself than what it signals. So far, strong growth and AI investment are helping the economy absorb higher borrowing costs. The bigger test will be whether that resilience holds if yields continue to climb.
(Disclaimer: This slideshow is based on inputs from agencies. These do not represent the views of The Economic Times)