Treasury Yields Near 5% After Soft Foreign Demand: A Red Flag For Stocks?
U.S. Treasury yields climbed sharply Monday after a 20-year bond auction showed signs of weakening foreign demand. This bolstered concerns over America's fiscal outlook and tested the market's tolerance for a 5% long-term yield threshold.
The spike in yields took place after 12:00 p.m. ET, with the 30-year Treasury yield rising 4 basis points to 4.96%, approaching the psychologically important 5% mark. The benchmark 10-year yield also rose 4 basis points to 4.45%.
20-Year Auction Triggers Yield Surge
Exante Data noted that Monday's 20-year bond auction showed a mixed picture of demand.
The U.S. Treasury sold $14.3 billion in bonds at a high yield of 4.94%, with a bid-to-cover ratio of 2.68—landing in the top quartile of the last 50 auctions, suggesting solid headline interest.
Primary dealers, who are required to take unsold debt, purchased 13.4%—in line with historical averages.
Direct bidders, including mutual funds and hedge funds, made up 19.9% of demand, also in the top quartile.
But indirect bidders, a group largely made up of foreign institutions, took just 66.7%—a level only slightly above the bottom quartile, pointing to weaker-than-usual foreign appetite.
The yield move rattled bond proxies. The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) declined 1% on the day, as longer-duration bonds remain highly sensitive to rate moves.
This yield spike follows a broader trend of tightening financial conditions, raising questions about whether higher yields could derail the ongoing stock market rally.
Does The 5% Yield Threaten Stocks?
In a report this month, Goldman Sachs analysts indicated that fears around the 5% threshold for long-term Treasury yields are largely overblown.
While investors often compare Treasury yields to the S&P 500's earnings yield—now also hovering around 5%—Goldman says this “parity logic” misrepresents the historical relationship.
"Because equities are tied to nominal earnings, we believe the inflation-adjusted real Treasury yield is a more appropriate comparator," Goldman said.
Historical data supports this view: when 10-year yields ranged from 5% to 6%, U.S. equities still delivered a median annual total return of 16%. Even during periods when yields exceeded 8%, stock returns averaged 19%.
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