TLDR
- 10-year Treasury yields briefly crossed 5% for the first time since 2007, then eased to 4.994%
- Markets price in an 89.5% chance the Fed hikes rates by 25 basis points on Wednesday
- DataTrek Research’s Nicholas Colas says 5% yields are not a stock market threat
- Colas favors software, energy, and financials as sectors to own now
- Treasury Secretary Scott Bessent says rising yields reflect global issues, not U.S.-specific problems
The 10-year U.S. Treasury yield briefly topped 5% this week, hitting levels not seen since 2007, before pulling back slightly to around 4.994% on Wednesday morning. The move has rattled markets and drawn wide attention from investors.
The spike came ahead of a Federal Reserve meeting where traders see an 89.5% chance of a 25 basis point rate hike, according to CME Fedwatch data. A hike would push rates to a one-year high.
Sticky inflation, rising oil prices, and hawkish signals from Fed officials have all pushed yields higher in recent weeks. The rally in yields lost some steam after weak New York manufacturing data raised concerns about the economic outlook.
Investors also started buying back into bonds after weeks of selling, helping push yields slightly lower.
What Is Driving the Yield Surge
Nicholas Colas, co-founder of DataTrek Research, says real yields are the core driver of this move. Real yields closed at 2.55% recently, the highest level since the global financial crisis, though still below the 3.06% peak hit in November 2008.
Colas points to persistent government spending as a key factor. With the U.S. running a deficit of around 5% to 6% of GDP, fiscal stimulus continues to push inflation higher and force the Treasury market to demand better returns.
The Treasury market, Colas says, is essentially asking for more than 5% to compensate for the risk that comes with a Fed holding rates at 4% and declining credit quality compared to a decade ago.
Treasury Secretary Scott Bessent told Congress this week that rising yields are linked to global factors. He also acknowledged the need to address the growing U.S. fiscal deficit and defended the Treasury’s strategy of doubling longer-term debt buybacks.
What This Means for Stocks
Despite the anxiety around 5% yields, Colas does not see a major threat to the stock market. He argues that strong corporate earnings growth is offsetting the pressure from higher discount rates, removing the need for multiple contraction.
He describes the current environment as the market doing the Fed’s job by slowing the economy and easing inflation pressures, rather than signaling a breakdown.
Colas sees software as deeply oversold compared to semiconductors and views it as a buying opportunity. Energy and financials also rank high on his list.
Financials had come under pressure from concerns that Treasury Secretary Bessent would cap long-end bond yields, but that has not happened, and earnings revisions for the sector are positive.
The key question now is whether the 10-year yield staying near 5% will push the Treasury to introduce further measures to bring rates down.
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