The bond market sell-off storm continues! If the 10-year US Treasury yield reaches 5%, or will it trigger a 10% correction in US stocks?

The Zhitong Finance App learned that the latest Markets Pulse survey shows that intensifying bond sell-off is driving US Treasury yields to a level that could cause a major blow to the stock market.

Of the 122 respondents to this survey, about 30% believed that the 10-year US Treasury yield of 5% to 5.25% would be enough to trigger a 10% drop from the peak in the stock market — this decline would be in line with the definition of a technical correction; another 22% set the trigger threshold at a slightly higher 5.25% — 5.5%.

On Thursday, the yield on the benchmark 10-year US Treasury once climbed above 4.98%, hitting a three-year high. The conflict sparked by US President Trump in the Middle East drove oil prices far above $100 per barrel, worsening the impact of inflation and sharply increasing the risk that the Federal Reserve will introduce countermeasures.

“People would think we are on the verge of a long-awaited correction in the stock market because real economic data and central bank policies are actually hitting risk-chasing investors hard,” said Joseph Bruzuelas, chief economist at RSM.

As the November midterm elections approach, US bond yields have raised concerns in the Trump administration as a key benchmark for capital costs and stock valuations in the wider economy. Survey participants listed accelerated price pressure and fiscal concerns as the biggest threat facing US debt over the next six months.

Since Trump began bombing Iran at the end of February, this key yield has increased by a full percentage point, and is currently hovering slightly below the 5% peak level hit at the end of 2023. At the time, the Federal Reserve had just finished raising interest rates aimed at curbing the sharp rise in post-pandemic inflation.

The reason behind this round of rising yields is that traders are expecting the Federal Reserve to raise interest rates again as early as next week. New Chairman Walsh is under pressure to prove he is ready to deliver on his promise to curb inflation — inflation has been above the Federal Reserve's target level since 2021.

However, more than 80% of survey participants believe that even if Walsh did lead the Federal Reserve to raise interest rates, this was one or two adjustments in the cycle, not the beginning of a new cycle of larger interest rate hikes.

Up to now, continued positive corporate earnings have hedged the impact of rising interest rates to a certain extent. Although the S&P 500 has dropped 2% over the past four days, it is still not far from the all-time high set last month.

Global borrowing costs have been rising, including growing government deficits and the influx of borrowing to invest in artificial intelligence (AI) is testing the market's ability to absorb such huge debt.

But inflation has been a key driver. On Thursday, the US Department of Labor reported that wholesale prices rose more than 5% year on year in August, even before the recent surge in oil prices. The Department of Labor will release consumer price index data on Friday.

A disorderly sell-off of bonds will pose the greatest risk. When asked what could trigger a deep crisis that would force Washington to respond, more than two-thirds of respondents said that the most important thing is the rate at which yields rise, not the absolute level.

“The 10-year yield looks like it will test the 2023 cycle high of 4.99%, and a new high will put more pressure on the stock market,” said Andrew Graham, partner at Jackson Square Capital. “However, from the perspective of stock market risk, the rate of increase in yield is far more important than the level itself.”

The continued expansion of corporate profits and large capital inflows into the AI sector drive economic growth. These two major factors have always supported the valuation of US stocks.

Macro strategist Tatiana Dari said, “The degree of pressure on the stock market depends on how long interest rate fluctuations last. “Simply focusing on yield levels may overestimate the threat to the stock market, which is being supported by a very real profit boom.”

Yes Securities analyst Hitshi Jahn said that based on analysts' expectations, the S&P 500 index's profit growth rate in the next year will be around 35% or even higher. He pointed out that the key risk is that these profits cannot be realized.

“As long as corporate profits continue to grow strongly and compounded, the stock market should be able to absorb structurally higher risk-free interest rates,” he wrote.

At the same time, some institutions predict that US bond yields may not reach a level that is dragging down the stock market. Sumitomo Mitsui Banking Corporation strategist wrote, “We believe that the 4.80% to 5% range may be the peak of 10-year US Treasury yields in recent months. There are signs that global demand for bonds may emerge when yields are at attractive levels.”