10-year yields climb to 5.02% as bond market issues alert before Fed meeting

The bond market is not waiting for the Federal Reserve, as is evident from the start of the week.

Yields on 10-year Treasuries have risen to 5.02%, extending a steady upward trend over recent weeks driven by persistent inflation, elevated oil prices and expectations of a more aggressive Fed.

The current level is close to surpassing the peaks reached in October 2023. A sustained move above 5.02% would bring yields into an area not seen since before the global financial crisis.

The negative effect on equities has already been observed. A yield above 5% is not inherently significant, but after a decade of low borrowing costs, a 5% risk-free return alters the outlook for nearly all asset categories, particularly high-valuation growth and technology shares.

Yet the main concern is not the current yield level.

Even if the Fed raises rates as anticipated this week, long-term yields may not fall. If investors conclude that inflation remains elevated or that further Fed tightening is needed, the 5% level might become a floor rather than a peak.

That scenario leads to a more troubling question: how high must yields climb before something in the financial system cracks?

If yields break above 5.02%, the next targets are the 2006 and 2007 highs around 5.25% to 5.28%. Given current geopolitical, fiscal and economic trends, these levels appear closer than they previously seemed.