U.S. Treasury yields are pressing toward the 5% threshold on the benchmark 10-year note, a level the market has not sustained for an extended period in almost two decades. The benchmark touched 4.8% on Friday before edging higher earlier in the week, marking its highest reading since October 2023.
The shift is being driven largely by rising real rates rather than inflation expectations alone. The U.S. Treasury's long-term real rate average climbed to 2.92% during the week of publication, up from 2.55% at the end of last year, according to Gennadiy Goldberg, head of U.S. rates strategy at TD Securities USA. "The recent rise in long-end Treasury yields has been driven predominantly by real rates," Goldberg said.
Meanwhile, the ratio of the 30-year Treasury yield to the S&P 500's dividend yield sits at its highest level since the dot-com bust in 2000, underscoring the growing divergence between fixed-income returns and equity valuations. Albert Edwards of Societe Generale noted that while such valuations would not in themselves trigger a bear market, they leave equities more vulnerable to adverse news. "A highly valued market is a fragile one," he said.
The yield move comes against a backdrop of accelerating nominal GDP growth — the economy expanded at a 6.07% annualized rate in the first quarter and 6.56% in the second quarter. That growth trajectory adds pressure on an already strained federal borrowing picture: U.S. government debt recently surpassed the $40 trillion milestone.
Higher borrowing costs are beginning to ripple through financial markets beyond rates themselves. One investor told Reuters that "the cost of doing everything is becoming more expensive and that's going to affect deal making," pointing to potential headwinds for M&A activity and corporate financing as the cost of capital continues to climb.
