Treasury yields climb further, raising question of 6% threshold

The bond market selloff shows no clear signs of easing.

The 10-year Treasury yield has climbed to 5.18%, extending its move above 5% and bringing a key technical level into focus. The next significant resistance lies in the 5.25% to 5.30% area, which corresponds to the highs seen in 2006-07.

What lies ahead from here?

Should the 2006-07 highs be breached, talk of 6% Treasury yields would become less theoretical. That level is on many investors' minds, but how plausible is it?

The fundamental forces that pushed yields above 5% have not disappeared.

Oil prices stay high, inflation worries persist, and US economic activity performs better than anticipated. Additionally, the Federal Reserve has adopted a more hawkish stance, with policymakers emphasizing the risk that strong demand may be keeping inflation elevated.

Underlying all this is a structural concern: growing unease about the US fiscal outlook. The widening deficit requires investors to absorb a large amount of government debt at a time when inflation uncertainty demands a higher premium for holding long-duration bonds.

This does not imply yields will move directly to 6%.

The 5.25-5.30% area remains the initial crucial test. Higher yields might eventually tighten financial conditions sufficiently to slow the economy. However, this should not be taken lightly. The chart is starting to appear concerning.

Currently, 6% is not the base case. But if the 5.30% level gives way while inflation, oil, growth, and fiscal concerns continue in the same direction, talk of 6% yields would become a more serious consideration for markets.