A sharp sell-off in the US bond market as the yield on the 10-year Treasury bond approaches 5%, causing market turbulence.

At the beginning of the new year, the drastic sell-off in the US bond market, the world's largest bond market, has attracted widespread attention from financial market investors. Over the past week, US Treasury bond yields have risen sharply, with the yield on the 10-year Treasury bond climbing to 4.796%, approaching the rare 5% level that has not been seen since the global financial crisis. Although the 10-year yield has approached 5% several times in recent years, why has this time triggered such a big market reaction? Nicholas Colas, co-founder of DataTrek Research, said: "The market is panicking about the 5% level on the 10-year yield because it exceeds the common understanding of interest rates for a whole generation over the past 20 years. The last time the yield broke 5% was in mid-2007, and we all know what happened next." According to FactSet data, the 10-year Treasury bond yield first broke 5% in June 2007, just five months before the Great Recession. Colas added: "Of course, the situation in 2025 is completely different from 2007, with both positives - a more stable banking system - and negatives - a higher level of US federal debt. However, market narratives often focus on some simple and observable figures, such as the 10-year Treasury bond yield." Colas believes that the US economy should be able to "withstand" a 5% level on the 10-year yield, but the stock market may not be willing to test this assumption. Last week, a series of strong US economic data prompted traders to reassess the outlook for Federal Reserve monetary policy. The market began to consider the possibility that the Fed might need to postpone rate cuts until the summer. This change in expectations dealt a heavy blow to the stock market. According to Dow Jones market data, last week the S&P 500 index gave back almost all gains made after the election, and the Dow Jones Industrial Average recorded its worst annual start since 2016. It is worth noting that the 10-year Treasury yield briefly touched the 5% threshold in October 2023, closing at 4.987% on October 19. However, the yield quickly fell back as traders doubted whether the Fed would keep borrowing costs high for longer. At that time, the US stock market also experienced a sharp decline and hit bottom a week after the bond market sell-off. Colas pointed out: "Although the yield subsequently fell, stock investors were extremely concerned about interest rates rising so rapidly to such high levels." Apart from the "brief" period in October 2023, Colas said, in the past 20 years, the 10-year Treasury yield has always been "far below 5%". This is mainly due to sluggish economic growth after the Great Recession, as well as the Fed's long-term bond purchases in 2008-2014 and 2020-2022. On Monday, most US stock markets closed higher, but tech stocks continued their decline from last week, as bond yields remained high. At the same time, investors are waiting for key inflation data to be released on Tuesday and Wednesday to better assess the possibility of Fed rate cuts this year. On Monday, the Nasdaq Composite Index fell 0.38%, the S&P 500 rose 0.16%, and the Dow Jones Industrial Average rose 0.86%. The 10-year Treasury yield rose by 3 basis points to 4.802%, while the 30-year Treasury yield was at 4.986%.