Here are the next key thresholds for investors to watch in the US bond market
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- Bond markets are under pressure, with yields rising globally this week.
- In the US, a 10-year Treasury yield above 5% would be the next level that could cause more volatility.
- Mohamed El-Erian said the fear is "interest rate risk turning into credit risk."
September has been tumultuous for markets and it's only two days into the month.
The bond market is the culprit behind the latest volatility, specifically a surge in global bond yields that's got investors on edge about what fixed income is saying about inflation and other macro concerns.
The 10-year Treasury yield on Wednesday was fluttering around 4.8%, its highest level since 2023. That's somewhat tame compared to global yields, which surged on Tuesay to the highest since 1996 in the case of the 30-year Japanese government bond and the highest since 1998 for the UK 30-year bond.
For now, investors are looking for clues about what's next.
Treasury Secretary Scott Bessent said last month that the Treasury could double purchases of long-dated bonds, sparking concern and drawing criticism from some of Wall Street's top commentators who say the move signals the government isn't thinking enough about addressing the fiscal issues that have been driving recent bond moves.
But as the bond market continues to spasm, there are a few key levels for investors to keep an eye on.
"The higher and longer yields persist, the more markets will be inclined to worry about interest rate risk turning into credit risk," stated Mohamed El-Erian, former former Pimco CEO turned Wharton economist.
Levels to watch for yields and oil
A 5% Treasury yields is considered by many investors to be a problem for stocks. There's a few reasons for that. One is that yields at that level present a compelling alternative. Why roll the dice in the equity markets when you can get virtually risk-free returns from bonds? A sudden shift to risk-off is likely to disrupt the stellar AI-fueled rally that's helped carry stocks to record highs this summer.
The second is that, as El-Erian alluded to, a persistent increase in yields raises borrowing costs for consumers and businesses, which is the credit risk the economist was referring to. Mortgage rates have already repriced in the face of this week's bond swings, with the 30-year home loan rising to 6.89% this week, according to Mortgage News Daily's latest survey.
Some strategists are urging calm as bonds convulse. Deutsche Bank said on Wednesday that a sharper and more persistent rise in the 10-year Treasury yield would need to be seen over the next year for stock investors to start to sweat.
"The House View at DB has long been that the backdrop is generally supportive of higher global yields," Jim Reid, the bank's global head of macro research, said. "My view is that the latest rise in global yields is a continuation of the normalisation after the financial repression of the 2010s, rather than a sign that markets are yet focused on fiscal concerns."
Meanwhile, Paul Hickey, co-founder of Bespoke Investment Group told Business Insider that he's most concerned about oil.
Specifically, he's eyeing US crude pushing past $90 per barrel, a level that was breached on Wednesday as fears about a re-escalation in the Iran war persist following fresh fighting last weekend.
"With crude rallying, yields have followed suit, and with WTI back to $90, a prolonged stay at these levels would likely push CPI higher and force the Fed into hikes," Hickey said. "If crude is still around these levels mid-month a hike will be on the menu for September's meeting."
Mark McClellan, chief US bond strategist at Alpine Macro, said his team sees the global borrowing glut as the primary driver behind the jump in yields, as demand outpaces supply on a global scale. He said investors should be watching near-term inflation prints for insight into how the bond market will continue to move.
And then there is the labor market. Investors will get payroll data for August this Friday, and the stakes are given the gyrations in bonds and the laser-focus on rate expectations heading toward the Fed meeting this month.
"Wage growth holds the key to whether inflation will prove persistent," McClellan noted. "While not a good leading indicator, it provides a strong confirming signal on whether consumer demand and inflation can be sustained. Watch the unemployment rate, which is more telling than payrolls. If it starts to rise, then this will take pressure off of the Fed to tighten. If it falls, then look out."
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