Unloved, but unbroken — the US bond market is working as it should: McGeever

It might be difficult for investors under the age of 35 to grasp, but a 10-year Treasury yield of 5% is not anomalous. What is unusual is the decade between the global financial crisis and the pandemic when the 10-year yield was in a 1.5-2.5% range, even falling as low as 0.5%, due to deleveraging and unprecedented government bond-buying.

Rising bond yields may still cause problems, of course. They could become onerous for the government and the private sector, especially borrowers fueling the powerful wave of AI-related debt issuance. But everything we’re seeing — so far, at least — is broadly in line with fundamentals.

The real question is whether markets will have to get used to these “higher” yields. The answer is likely a qualified “yes.”

Inflation has been above the Fed's 2% target for almost six years, meaning inflation expectations risk becoming unmoored. Consumers and businesses could be forgiven for thinking that the Fed implicitly sees 3% inflation as the new 2%. There is some evidence that it already does — the 5-year inflation outlook in the University of Michigan consumer expectations survey hasn't been below 3% for more than two years.