10-Year Treasury nears 5% as US debt tops $40 trillion

The 10-year Treasury yield rose to 4.69% Thursday, within 30 basis points of the 5% level Jefferies' Christopher Wood flags as the trigger for equity risk.

"The fiscal deterioration is clearly one of the forces putting upward pressure on long-term Treasury bond yields," Wood wrote in Jefferies' GREED & fear report, citing a $432 billion July deficit, the highest monthly level since March 2021.

The yield touched 4.746% on Tuesday before the Treasury said it would at least double buybacks of longer-term bonds, pushing the 10-year to 4.63% and the 30-year to 5.18%. The S&P 500 fell 0.9% Thursday to a two-week low, with consumer staples down 2% and discretionary stocks off 1.7%, while energy gained 0.4%. Walmart dropped 9%, its biggest one-day fall in four years.

With the annualized US fiscal deficit at 6.1% of GDP and nominal GDP growth of 5.9% running above the 10-year yield, Wood sees pressure for yields to move higher. A break above 5% would undermine equity valuations just as foreign holdings of US stocks hit a record $24.5 trillion.

The Fiscal Arithmetic Behind the Yield Climb

US total public debt rose 7.8% from a year earlier to $40.05 trillion as of August 18, Treasury data cited by Wood showed. The cumulative deficit for the first 10 months of the fiscal year reached $1.799 trillion, already exceeding the $1.775 trillion recorded for the whole of fiscal 2025.

The deterioration partly reflects the fading contribution from tariffs. Monthly tariff revenue was a negative $8.5 billion in July after a negative $25.56 billion in June, compared with a positive $22.12 billion in April. Total federal receipts fell 1.3% year-on-year in July, while government outlays jumped 21.7%, with national defence expenditure up 19.9%.

Bessent's Defense of the 5% Line

Treasury Secretary Scott Bessent appears focused on stopping the 10-year yield from reaching 5%, according to Wood. The Treasury's decision to at least double longer-term bond buybacks followed Bessent's earlier foray into currency markets to support Japan's yen, raising questions about policy consistency. Fed Chair Kevin Warsh has said bond yields are a useful guide for policymakers, and rate markets now price a 35% probability of a September hike.

Long-dated US Treasuries have been in what Wood called a "brutal bear market" since March 2020. The Bloomberg US Long Treasury total-return index has fallen 39% over that period, an annualized decline of 7.3%. The S&P 500, by contrast, has advanced 279%, or 23.1% annualized, since its March 2020 low.

The US also remains heavily dependent on foreign capital. Its net international investment position deficit widened from $7.8 trillion at the end of 2017 to a record $22.1 trillion, or 75.5% of GDP, at the end of 2024. Foreign portfolio holdings of US equities climbed 24.5% year-on-year to a record $24.5 trillion at the end of June, with annualized foreign net purchases surging to a record $919 billion.

Japanese investors held $1.12 trillion of US Treasuries at the end of June, down from $1.24 trillion in February. Wood expects pressure on Japanese institutions to sell long-term Treasuries to intensify as domestic bond yields rise and the Bank of Japan faces calls to tighten.

Not everyone sees 5% as a hard line. The view that the 10-year yield crossing 5% would automatically tank stocks is too simplistic, according to a Barron's analysis, which notes the S&P 500 has delivered a 23.1% annualized total return since March 2020 even as long-dated Treasuries entered a bear market. The current yield environment does offer investors a rare opportunity to lock in meaningful income from government bonds.

Against that backdrop, Wood remains bullish on hard-asset hedges, recommending oil and energy stocks as the best hedge against Strait of Hormuz disruption, with gold the second-best option. He is also increasing exposure to gold miners across his model portfolios.

This article is for informational purposes only and does not constitute investment advice.