Investors start to worry about 6% Treasury yields as 5% Treasury yields begin to lose their shock value.

Years ago, 5% of the benchmark US 10-year Treasury?yield had been regarded as the point where global financial markets began to experience turbulence. This threshold is becoming less of a ceiling, and more like a waypoint.

This month's breaching of 5%, something that has only happened briefly in recent decades, has forced investors into a?unsettling thought:?What happens if 6% becomes the number that keeps them up at night?

This theory hasn't been tested enough by the latest move above 5%. Mike Bell, BlueBay Asset Management’s head of Market Strategy, says that it was always a psychological indicator and not a tripwire.

Bell explained that people think there is a magic number at which Treasury yields become a problem. "But it's not an absolute number but a relative one," Bell said.

It is important to compare Treasury yields with other investment metrics. This includes the earnings yield of stocks. Bell claims that the relationship is approaching an inflection, which could set up a selloff of stocks.

The past offers some guidance. MSCI's world stock index lost half its value when the 10-year Treasury yield crossed 5%. This was right before the global financial crisis. It suffered a similar decline less than a decennium earlier, when a 6.8% increase helped burst the dotcom boom.

Analysts at JP Morgan say that a "key shift" in the global economy is one reason why the pain point could be back above 5%. AI, healthcare, and services are playing a larger role. These firms continue to spend and expand, regardless of how high borrowing costs are.

JP Morgan stated that the traditional interest rate channel "looks materially less bound" and the "breaking-threshold" of the stock markets could be "significantly higher, possibly?in a range of 5.5%-6.0%", referring to the views expressed by some of its major investors during one of their most recent conferences.

REPRICING - a firm price

A shift from 5% up to 6% in the $29 trillion Treasury market would be a 'profound adjustment of the global capital cost.

A Treasury yield of 6% would indicate either significant higher inflation expectations, growing concern about US fiscal sustainability or a conviction that rates will remain high for years.

Austan Goolsbee, a Federal Reserve policymaker, said that he did not know if markets would react differently if 5% yields were extended for a longer period than in the past.

Invesco's global head of asset-allocation research, Paul Jackson, explained that investors are focused on Treasury yields because they represent the risk-free benchmark for the world. At above 5%, investors have the opportunity to lock in their highest returns since 2007.

Jackson's calculations show that world stocks begin to fall when the 10-year bond yield has traded at 4.72% on average for 12 months, and then increases.

The tipping point is still a long way off - the average 12-month yield is around 4.34%. But Jackson has already started to reduce his stock holdings and put some of his money in government bonds, hoping to take advantage of the high yields.

He said that if Treasury yields continue to rise, the risk is that in a year's time the stock market will be lower.

Emerging Questions

When US yields rise, emerging markets that have been on a "hot streak" in recent years are usually "among the first victims".

Dollar-denominated investments become more appealing when Treasury returns are higher. This drains capital from EM economies, and can push hard-up nations into crisis if their dollar-denominated loans spiral out of control.

Last week, data on investment?flows showed the largest exodus of EM bond funds for months. Billions were also withdrawn from equity fund. The issuance of emerging-market sovereign bonds has also been notably lighter this month.

Alison Shimada is the Head of Total Emerging Markets Equity at Allspring Global Investments. She said that while the picture was not ideal, it was still "constructive" because for now, nothing "horribly went wrong".

The biggest psychological risk is the most likely.

Investors will begin to question whether 6% can be achieved, and the discussion will move beyond a temporary increase in yields. The debate shifts to the possibility that?the era of abundant liquidity and ultra cheap money is over, forcing global asset values to adjust to a permanent higher cost capital.

Premier Miton CIO Neil Birrell stated that while the stock market is not showing signs of collapse right now, this could be because investors haven't yet plugged in 5% plus yields to their long-term profit forecasting model.

Birrell stated that "the markets appear fine until everyone runs their valuation models again." "The numbers will come out in the end."

(source: Reuters)