In the ever-transforming landscape of the United States economy, a recent wave of favorable news has quickly turned sour for the marketsOn Friday, October 10th, robust non-farm payroll data emerged, leading to diminished expectations of interest rate cuts by the Federal ReserveThis shift triggered a sell-off in U.STreasury bonds, causing the yield on 30-year T-bonds to exceed 5% at one point, while the 10-year bond yield soared to its highest level since October 2023, reaching 5% as wellConsequently, U.Sstocks took a significant hit, with the S&P 500 dropping by 1.5%—the largest single-day decline since mid-December of the previous year.

The decline in anticipated rate cuts from the Fed was compounded by the mounting concerns over fiscal deficitsTraders on Wall Street find themselves increasingly anxious about the possibility of a simultaneous downturn in both stock and bond markets

The fear is that the global bond markets could be heading toward a crisis, with bond yields returning to pre-financial crisis averages, while equities continue to face substantial retreats.

Notably, the average yield on 10-year U.STreasury bonds has risen by more than one percentage point over the past four monthsThe last time this yield touched this benchmark was in October 2023, and prior to that, one must look as far back as July 2007. Data indicates that between 1988 and 1997, the average yield for 10-year bonds exceeded 6%. Then, from 1998 to 2007, this average dropped to about 4.5%, but post-2008 financial crisis, the average remained slightly above 2% until 2022.

Strategists at Invesco's Asia Pacific division, excluding Japan, highlight that investors are increasingly concerned about the potential economic policy changes that could arise from this situationU.STreasury bonds have been at the forefront of the recent sell-off

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While proposals for tax cuts in the United States could stimulate economic growth, they would also exacerbate an already strained federal budget and drive inflation higherFurthermore, tariffs could contribute to sustained high levels of inflation.

Similar spikes in bond yields have begun to unfold worldwideAccording to Zhao Yaoting, investors have become more cautious across developed markets, not just in the United StatesMany major economies are grappling with significant public debt burdens, leading countries such as South Korea, France, Germany, the United Kingdom, and the U.Sto confront budgetary challenges.

Richard Peters, co-chief investment officer for fixed income at Prudential Financial, suggests that this phenomenon reflects a broader emotional release on a global scaleFor some, the rise in yields represents a natural correction following years of near-zero interest rates in the aftermath of the financial crisis and the pandemic

Yet, others are recognizing a new, concerning dynamic that presents substantial challenges for the bond market.

It is significant to note that the current surge in bond yields is occurring amidst a cycle of interest rate cuts from the Federal ReserveThe Bloomberg U.SBond Index has dropped by 4.7% since the Fed's first rate cut last September, while the S&P 500 has gained 3.8% during the same periodThe Bloomberg Global Government Bond Index has fallen by about 7% since its onset, with declines reaching 24% from the end of 2020 to the presentAccording to Deutsche Bank data, the performance of 10-year U.STreasury bonds ranks as the second worst across 14 easing cycles since 1966. Bob Bakish of LPL Financial noted, “This is quite unusualTypically, mid-term and long-term bond yields remain relatively stable or experience slight increases a few months after the Fed sets off a series of rate cuts.”

Alongside dwindling expectations of rate cuts, concerns are growing among investors regarding fiscal and budgetary decisions and their implications for the markets and the Federal Reserve.

According to estimations from the nonpartisan Congressional Budget Office last year, the U.S

fiscal budget gap is projected to exceed 6% of Gross Domestic Product by 2025. This is a significant gap, particularly in a robust growth environment with low unemploymentThe prevailing preferences for tariffs, tax cuts, and regulatory rollbacks could amplify the deficit and reignite inflationary pressures.

Under the leadership of the U.S., outstanding government debt across OECD countries has increased by 35% since 2019, reaching a staggering $54 trillionThe debt-to-GDP ratio in OECD nations jumped from 73% pre-pandemic to 83%. The Washington-based organization, the Committee for a Responsible Federal Budget, estimates that U.Seconomic plans—including the extension of tax cuts from 2017—could increase debt by $7.75 trillion before the fiscal year of 2035.

Richard Peters remarked that given this environment, the surge of the 10-year U.STreasury yield above 5% is not surprising, stating, “U.S

bond yields are set to reset to a higher range.” Recently, BlackRock and TRowe Price have both stated that a yield of 5% is a reasonable target, as investors may demand wider spreads to continue purchasing long-term T-bondsBank of America asserted that U.STreasuries have entered their latest “great bear market,” marking the third such occurrence in 240 yearsThe previous bull market for bonds concluded in 2020 when yields hit historic lows shortly after the onset of pandemic lockdownsYet, this period of abnormally low yields appears to be over.

Expectations suggest that U.Sstocks could face a downturn of 10% to 15% in the near term.

The S&P 500 index experienced an impressive upswing of over 50% from early 2023 to the end of 2024, resulting in a total market cap increase of $18 trillionHowever, data from the world’s largest ETFs tracking the S&P 500 and long-term U.S

Treasury bonds indicate a five-week streak of negative returns, marking the longest consecutive negative return period since September 2023.

Hanas, a manager at hedge fund Peconic Partners, was among the few who anticipated this scenarioCiting concerns that both a weak and strong economy could pose risks to bullish U.Sstocks, the fund has been lowering leverage, shorting real estate-related stocks, and limiting exposure to tech giants“Investors could very well face a scenario of losses in both stock and bond markets,” he stated.

Stell, head of developed markets strategy at the Eastern Credit Research Institute, remarked, “Markets are most concerned that the Fed won’t be able to lower interest rates any further and will drive up U.STreasury yields to 5% in the coming monthsUnless the first-quarter earnings reporting season performs exceptionally well, U.S

stocks will be under pressure.”

Currently, the S&P 500 index's yield is one percentage point lower than the yield on 10-year U.STreasury bonds, a situation not observed since 2002. In other words, returns on assets with much lower risk compared to the U.Sstock benchmark have not been this attractive in a long time, leading to a natural diversion of capitalPalen, global solutions director at Janus Henderson, commented, “If the yield on the 10-year U.STreasury reaches 5%, investors will instinctively sell their U.SstocksThis sell-off typically lasts for several weeks or even months, during which the S&P 500 could retreat by 10%.”

A report from Morgan Stanley further emphasizes that should the yield on the 10-year U.STreasury continue to rise, the stock market could face even steeper declinesCurrently, the S&P 500's price-to-earnings ratio stands at approximately 21.2, higher than the 18 multiple observed when 10-year U.S