A 6% Treasury yield would imply either significantly higher inflation expectations, growing concerns about US fiscal sustainability, a conviction that interest rates will remain elevated for years — or a mix of all three.
Federal Reserve policymaker Austan Goolsbee said this week that he didn't know whether markets would react differently to a lengthier period of 5% yields than they had in the past.
Paul Jackson, Invesco global head of asset allocation research, said investors focus on Treasury yields for a simple reason: Treasuries represent the world's risk-free benchmark and at above 5%, investors can lock in the highest returns on US bonds since 2007.
Jackson's own calculations show world stocks start to drop when the 10-year yield has traded at an average of 4.72% for 12 months and then rises.
That tipping point remains some way off for now — the 12-month average is currently around 4.34% — but Jackson said he was already dialling back on stocks and switching some money into government bonds to cash in on the juicy yields.
"If Treasury yields keep rising then there is a risk that the stock market is lower in 12 months' time," he said.
Emerging markets, which have enjoyed something of a hot streak in recent years, are often among the first casualties when US yields surge. Higher Treasury returns tend to strengthen the dollar and make dollar-denominated assets more attractive. That sucks capital away from EM economies and can tip hard-up countries into crisis if the cost of servicing their dollar-denominated debt spirals.
Data on investment flows shows last week saw the biggest exodus from EM bond funds in months, with billions also withdrawn from equity funds. Issuance of emerging-market sovereign debt has also been notably lighter than usual this month.
"It's not an optimal picture for EM," said Alison Shimada, Head of Total Emerging Markets Equity, Allspring Global Investments, although she stressed that for now nothing was going "horribly wrong" and therefore remained "constructive".
Perhaps the biggest risk is psychological.
Once investors start asking whether 6% is attainable, the debate shifts beyond a temporary spike in yields. It becomes a broader reckoning with the possibility that the era of abundant liquidity and ultra-cheap money has ended, forcing global asset prices to adapt to a permanently higher cost of capital.
Premier Miton CIO Neil Birrell said while stock markets were showing no sign of collapsing right now, that might be because investors weren't yet plugging in 5%-plus yields into their longer-term profit forecasting models.
"The markets look fine until everyone re-runs their valuation models," Birrell said. "Ultimately, the numbers are the numbers and they've got to come through."
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