The U.S. Treasury yield breaking above 5% may only be a prologue; Wall Street has drawn the financial market's "line between life and death": 5.25%.

U.S. stocks are entering the most volatile season in history, and the bond market has already torn open a gap first: the 10-year U.S. Treasury yield touched 5% on Monday (September 14), the first time since October 2023; on Tuesday it rose further to 5.041%, a new high since July 2007, while the 30-year yield briefly reached 5.399%. But unlike the October 2023 episodewhen the S&P 500 was about 10% below its record high and the market was already digesting the spillover shock from a global bond selloffthe benchmark index is now just 2.5% away from the record high set in August. The real question for the market is: has U.S. equity valuation left almost no room for this round of rising yields? At the same time, there is another question. This week, as the 10-year U.S. Treasury yield rose above 5%, the first issue is: can yields keep rising? Yields appear too high, and today they climbed to the highest level since 2007, but U.S. Treasuries have not yet been oversold. If total return and price factors are taken into account, on an annual growth basis, their yield has only fallen back to its long-term average. Everyone is waiting for Warsh's answer. Strategists at several institutions, including Wells Fargo, believe the rapid rise in yields will trigger anxiety on Wall Street, and the specific impact on U.S. stocks may depend on how fast yields rise in the future. The threat mechanism from yields is not new: higher bond yields the present value of future profits, making stocks less attractive relative to risk-free assets, while also raising corporate financing costs and squeezing profit margins. Before 2023, the last time the 10-year yield was at such a high level was at the beginning of the global financial crisisa crisis that ultimately forced policymakers to cut rates to near zero and launch massive quantitative easing. It is particularly worth noting that high-growth, high-valuation tech stocks are generally considered more vulnerable to rising rates, because their valuations are largely based on expected profits that will only be realized years from now. Portfolio managers, including those who have long been bullish on the sector, believe rate-sensitive tech stocks may face new losses aheadgiven that prices for goods and services remain elevated, signs suggest Warsh is very likely to deliver on his policy threats. Against this backdrop, what is really putting traders on edge is Wednesday's (September 16) Federal Reserve rate decision and Chair Warsh's subsequent press conference. After the August inflation report showed prices continuing to rise, traders saw the probability of a rate hike on Wednesday at more than 90%; Morgan Stanley has even joined the hawkish camp, expecting the Fed to raise rates by 25 basis points each in September and December. "If the Fed signals it will hike once and then hit the brakes, traders will breathe a sigh of relief," said Max Wasserman, senior vice president and portfolio manager at Wealth Enhancement's Miramar team. "But if there is no assurance about how many more hikes are coming, or any hint that it will take time for inflation to come down, then yields above 5% will demand that long-duration tech stocks fallinvestors will reassess those expensive valuation multiples." Ohsung Kwon, chief equity strategist at Wells Fargo, offered a counterintuitive judgment in a phone interview: "Investors will probably welcome a 'one-and-done' message. If they don't hike, that would actually be bad for stocks"because long-end U.S. Treasury yields could surge further. ING FX strategist Francesco Pesole also called the current bond market performance a "warning signal": if the Fed stands pat at this point, it could trigger unnecessary market turbulence. Point map: 5%, 5.10%, 5.25%, and behind each line is a market logic. Treasury prices have mean-reverting characteristics, meaning they fluctuate around a long-term average. They will eventually return to the average, but usually overshoot afterward. Therefore, before Treasuries are truly oversold, they may fall further. Wall Street has already turned this yield breakout into a layered map. Wasserman believes the psychological threshold for the S&P 500 is a 10-year yield between 5% and 5.25%; Andrew Graham, partner at Jackson Square Capital, said that once yields stand above 5.10%, a U.S. stock correction will begin; Dennis DeBusschere of 22V Research believes that yields hovering in the 4.8% to 5% range will itself weigh on economic growth. Wolfe Research chief economist Stephanie Roth put it more directly: bond yields must fall for U.S. stocks to resume their advance. "If rates or oil prices rise further, a more meaningful stock market correction may be ahead." Another analysis elevates the issue from "levels" to "regime": when the 10-year yield is significantly above 5.25%, historically stocks and bonds almost always move in the same directionstocks and bonds reinforcing each other's losses. In periods when yields were below 5.25%, the correlation between the S&P and U.S. Treasuries was almost never negative, which is strikingly rare. From 2022 through the end of last year, when yields were below 5.25%, the stock-bond correlation was positive, and this year it has trended toward flatand if yields continue to rise, the correlation is likely to fall firmly back into positive territory. When the 10-year U.S. Treasury yield is far above 5.25%, the market regime changes significantly. After that, the risk of bond volatility, and in turn its impact on equity volatility and credit spreads, increases markedly. That means bonds are no longer a hedge for stocks. The transmission chain links one ring to the next: U.S. Treasuries become less attractive as a portfolio hedge, marginal buyers become more price-sensitive, and the market becomes more sensitive to fund flows; investors turn to options to hedge Treasuries, pushing implied volatility higherTreasury volatility rises first, and this is precisely the official reason given by the U.S. Treasury last month when it announced enhanced buybacks (to maintain Treasury liquidity). Next, equity index volatility cannot remain unaffected: stocks and bonds amplifying each other's gains and losses will make asset rebalancing flows more unstable and push up the VIX; rising demand for equity option hedges will also support implied volatility. The third channel is especially critical todaybond volatility intensifies uncertainty about cash flow discount rates, and record-low correlations among individual stocks show that the market has priced in almost nothing for the most dominant single-factor risk: "long-term interest rates." Extremely low stock correlation suppresses the transmission of individual stock volatility to the VIX. Although single-stock volatility has fallen from the highs of the meme frenzy period, if correlation rises, the VIX will still be significantly affected. Credit spreads are equally hard to spare. Low index volatility is one of the key factors suppressing spreads, and high-yield spreads and the VIX often move in lockstepthe latter usually enters credit pricing through the Merton model. Valuation alarms and contrarian bets. One closely watched indicator is the equity risk premiumthe difference between the S&P 500 earnings yield and the 10-year U.S. Treasury yield, typically used to measure the attractiveness of stocks relative to other assetsand it is currently hovering near its lowest level since 2002, meaning stocks will be more sensitive to every move in bond yields. The strategist team at JPMorgan led by Nikolaos Panigirtzoglou expects the premium to narrow to 100 basis points below its historical average, one reason being precisely the increased sensitivity of stocks to bond yields. Of course, some are betting the bond selloff is near its last legs. Larry Adam, chief investment officer at Raymond James, noted: "Investor bearishness on bonds is already extremely pessimistic, speculative short positions in 10-year Treasuries are near record highs, and this selloff looks increasingly overextendedsuggesting yields may be closer to a peak than to the start of a new sustained rise." Several potential supports for yields to stop rising: news that AI labs are slowing model development may simply be a convenient excuse for a pullback in capital expenditurea "kick in the shin" for economic growth; but given that take-or-pay compute contracts have already been laid out through next year and beyond, it may not be enough in the short term to trigger a bond market rebound. Real-money buyers or funds hedging mortgage-backed securities may step in when yields remain above 5%, but that has not yet appeared, and the impact may only be temporary. Meanwhile, the commodity rally is still building, energy and food supply disruptions in the Middle East and Russia have not improved, and structural price pressure is a tailwind that yields will struggle to disperse. A paradoxical possibility lies before Wednesday: a rate hike may actually attract Treasury buyersif the market concludes the Fed is serious about suppressing inflation; conversely, standing pat may push yields even higher. The stance of Girard chief investment officer Tim Chubb represents the moderates: "As long as the hike is not aggressive, the Fed will not interrupt this bull market. But the most fragile and most prone to overreaction corner of the market is likely high-valuation tech stocks." Either way, U.S. Treasuries are approaching a turning point. The S&P 500 has risen 20% since its late-March low, adding $11 trillion in market value, while during Monday's bond selloff the VIX remained steady near 17not a typical level for a market under pressure. How long the calm can last depends on whether, after Wednesday, the 5.25% line is truly stepped on. If the 10-year yield stays above 5.25% long enough, the trading environment and the way asset prices behave will be completely different from the past three years.