U.S. Treasury Yields Surge, Stock Market Sells Off 60 Basis Points

This week, the surge in U.S. Treasury yields has begun to impact the U.S. stock market, with the three major indices experiencing their most significant sell-off since April. This has led many on Wall Street to question how much further the yields need to rise to pose a serious threat to the stock market.

According to Goldman Sachs, the answer may not be far off. Historical data suggests that the critical variable is the speed at which Treasury yields rise, rather than their absolute level. When the 10-year Treasury yield increases by approximately two standard deviations within a month, the stock market tends to react. Based on the current level of the 10-year Treasury yield, this threshold is around 4.75% to 4.80%, which would represent an increase of about 60 basis points from the lows seen earlier this month.

The overnight movements in the U.S. Treasury market showed a general decline in yields across all maturities, as buyers were attracted to the more appealing yield levels following recent selling. However, the significant intraday volatility indicates that the bond market turmoil, triggered by the Trump administration's tax cuts and the downgrade of the U.S. credit rating, has not yet fully subsided.

Data from the market showed that the benchmark 10-year Treasury yield fell by about 4.6 basis points to 4.551% at the end of the session, after reaching an intraday high of 4.629%, the highest level since February 12. The 30-year Treasury yield also declined by 2.6 basis points to 5.063%, after briefly touching 5.161%, a level not seen since October 2023.

On Wednesday, the U.S. government auctioned 160 billion dollars of 20-year bonds, which saw weak demand, exacerbating market concerns about declining demand for U.S. Treasuries. This auction was the first since Moody's downgraded the U.S. sovereign rating from Aaa last Friday.

Zachary Griffiths, head of investment-grade and macro strategy at CreditSights, noted that various factors are raising doubts about the demand for long-term U.S. Treasuries and other long-term sovereign bonds. The biggest concern this week, however, may come from the Trump administration's push for the so-called "Beautiful Bill," a tax reform bill that would significantly cut taxes, reduce social spending, and increase federal debt. The Republican-controlled House of Representatives passed the bill on Thursday with a narrow margin of 215 to 214 votes. The bill will now move to the Senate, where Republicans hold a slim majority.

The Congressional Budget Office estimates that this bill would increase the U.S. national debt by over 3.3 trillion dollars over the next decade, raising the federal government's public debt from the current level of about 98% of GDP to 125%. The aggressive selling of Treasuries over the past week reflects the market's opposition to this comprehensive bill. John Fath of BTG Pactual's U.S. asset management division stated, "Clearly, people have had enough: there are no 'adults' in Washington, and there is almost no accountability. How do you make them take responsibility? The answer is market prices."

This scenario is reminiscent of last month's standoff between Trump and the bond market, which ended with the president backing down. On April 9, as Trump's retaliatory tariffs took effect, Treasury yields spiked, forcing Trump to delay the implementation of tariffs on dozens of countries. However, this time, with Trump eager to secure a major legislative victory, he may not be as quick to concede. This could further exacerbate the bond market's precarious situation. If the U.S. Treasury market remains unstable and yields continue to rise sharply, it could stifle economic growth and accelerate the deterioration of government finances. Higher interest rates would also increase the U.S. Treasury's interest payments.

George Catrambone, head of fixed income and trading for the Americas at DWS, highlighted the dilemma facing investors: "Investors now face a very difficult question: are you willing to lend money to the U.S. government at a 5% interest rate for a 30-year period? This is the core issue we are facing."