US debt is experiencing “Black Wednesday”! The five-year yield rose above the highest level in nearly 20 years, and 6% became a new panic line?

The Zhitong Finance App learned that on Wednesday, the decline in the US Treasury bond market intensified, and strong economic data and weak debt auctions pushed the majority term yield to the highest level in nearly 20 years. The auction results pushed the 5-year US Treasury yield above 5% for the first time since 2007. For many years, reaching 5% of the benchmark US 10-year Treasury yield was viewed as the tipping point where turbulence in global financial markets began. Today, this threshold looks more like a signpost than a ceiling.

The two-year and three-year periods became the only interest-bearing period below this milestone level, and the 10-year yield recorded the biggest increase since “Liberation Day” in April 2025 — when US President Trump introduced comprehensive tariffs that caused market turmoil.

5%, which has only been around for a short time in recent decades, has forced investors to think about an unsettling question: What if 6% is a new number that should keep people up all night?

Multiple combos detonate “Black Wednesday”

Sean Simcoe, head of fixed income investment management at SEI Investments, said, “You don't want to stand in front of a speeding train today,” and “you're seeing three consecutive hits — stronger economic data, supply-driven five-year yields to levels not seen in many years, and the view that global inflation is stubborn.”

Strategist Brendan Fagan said, “Strong growth, stubborn inflation, questions surrounding energy intervention, and the hawkish Federal Reserve have created an almost perfect storm of higher yields.”

Economic data and the sharp rise in oil prices caused by the Middle East impasse prompted traders to increase their bets on the Federal Reserve's further tightening policy. Officials raised interest rates for the first time in three years last week, raising the interest rate target range to 3.75%-4%. Chairman Kevin Walsh said the move eliminated “some degree of easing.”

The swap market now fully reflects the 25 basis point rate hikes three times in the next year, and heavily hedged against the fourth rate hike. If achieved, the Fed's target interest rate will rise to the 4.75%-5% range.

“The pressure on the short-term yield curve is beginning to build up,” said Christophe Boucher, chief investment officer at ABN AMRO Investment Solutions. He said Wednesday's economic data would allow the Federal Reserve to “double bet” on its hawkish stance.

Policymakers are increasingly worried that inflation will not fall back to the 2% target in five and a half years, and some warn that price pressure appears to continue as international tension keeps energy prices high. This all happened against the backdrop of a strong US labor market. Federal Reserve Governor Michael Barr said on Wednesday that further rate hikes may be necessary to bring inflation back to the central bank's target.

Furthermore, the sharp fall in bonds has increased the Ministry of Finance's interest in expanding the buyback program. The plan was announced in mid-August, when long-term yields rose to multi-year highs and have since been surpassed. The second expanded operation is scheduled to take place on Thursday and targets 20 to 30 years' maturing debt.

Benchmark 20-year and 30-year yields continued to rise after announcing the buyback target — which officials previously said would be at least $4 billion — the same as the first expansion of operations on September 10.

Weak US bond auctions are also worth watching. The decline in bonds in early trading paved the way for the $70 billion five-year US bond auction in the afternoon. The yield from winning the auction was the highest since 2006.

The 5.033% yield required to clear the auction was more than 3 basis points higher than expected before the bid closed. Measured in this way, this was the second-worst five-year auction since records began in 2018, after the results of June 2022 — the first of several massive 75 basis point rate hikes by the Federal Reserve at the time.

The five-year yield surged 20 basis points on Wednesday, the biggest sell-off since 2024. The yield broke through a high of 4.99% at the peak of the Federal Reserve's rate hike cycle in 2023.

Meanwhile, the 10-year yield rose nearly 17 basis points to 5.13%, the highest since 2007. This term yield — the benchmark for mortgages to global corporate bonds — will rise for the seventh month in a row, leveling the longest continuous rise since 2011. The 30-year yield is about 5.4%, the highest since 2007, and only about 4 basis points from the highest level since 2004.

“This is a collapse,” said Subadra Rajapa, head of US research at Société Générale, when talking about the bond sell-off. “The sell-off began with overseas global bonds, but things are getting a little out of control as we break through critical levels.”

Will US Treasury yields rush to 6%?

When the 5% US Treasury yield lost its impact, investors began to worry about 6%.

The duration of the latest round of rising above 5% is not enough to fully test this theory. But Mike Bell, head of marketing strategy at BlueBay Asset Management, said that 5% is always a mental marker rather than an automatic trigger line.

“People think there is a magic number for US Treasury yields, and there will be problems when it is reached, but this is a relative number, not an absolute number,” Bell explained. The key is the comparison between US Treasury yields and other key investment indicators — particularly stock earnings yields. Bell said that this relationship is nearing an inflection point and may lay the groundwork for a stock market sell-off.

History can provide some guidance. The last time the 10-year US Treasury yield surpassed 5% was on the eve of the global financial crisis. At that time, the market value of MSCI's major global stock indices fell short. Less than ten years ago, the index experienced a similar sharp drop. At that time, the yield was close to 6.8%, breaking the internet bubble.

Analysts at J.P. Morgan Chase said that one of the reasons the pain point is likely to be higher than 5% again is that the global economy has undergone a “key structural shift,” with artificial intelligence, healthcare, and services playing a more important role. Many of these businesses are spending and expanding regardless of the cost of borrowing. This means “the binding power of traditional interest rate channels has clearly weakened,” and the “collapse threshold” of the stock market may be “significantly higher, or in the 5.5%-6.0% range,” J.P. Morgan Chase quoted some major investors at its most recent meeting.

In the $29 trillion US bond market, which anchors the pricing of almost all financial assets, a rise from 5% to 6% would mean a profound adjustment in global capital costs. The 6% US Treasury yield would suggest that either inflation expectations rise significantly, or concerns about US fiscal sustainability increase, or confidence that interest rates will remain high for many years — or a combination of the three.

Federal Reserve policymaker Ostan Goulsby said this week that he doesn't know if the market's reaction to maintaining a 5% yield for a longer period of time will be different than in the past.

Emerging markets bear the brunt

Emerging markets, which have performed well in recent years, are often the first victims when US bond yields soar. Higher returns on US bonds often boost the dollar, making dollar-denominated assets more attractive. This will drain capital from emerging market economies, and if capital-tight countries' dollar-denominated debt repayment costs spiral, it may also plunge them into crisis.

Investment flow data shows that emerging market bond funds experienced the largest outflow of capital in months last week, and equity funds also withdrew billions of dollars. The issuance of sovereign bonds in emerging markets this month was also significantly lower than usual.

“This is not an ideal situation for emerging markets,” said Alison Shimada, head of emerging markets equities at Allspring Global Investments, and she remains “constructive” despite stressing that there are no “serious issues” at the moment.

Perhaps the biggest risk is psychological. Once investors began to question whether 6% could be reached, the debate was no longer limited to a temporary spike in yield. It became a broader reflection on the likely end of the era of abundant liquidity and ultra-cheap capital, forcing global asset prices to adapt to permanently higher capital costs.

Premier Miton's chief investment officer Neil Birrell said that although the stock market currently shows no signs of collapse, this may be because investors have yet to include a yield of 5% or more in their long-term profit forecasting models. “The market looked fine until everyone in the market re-ran the valuation model,” Birrell said. “At the end of the day, numbers are numbers, and they have to be reflected.”

Paul Jackson, head of global asset allocation research at Invesco, said that the reason investors are concerned about US bond yields is simple: US bonds represent the global risk-free benchmark. Above 5%, investors can lock in the highest return on US bonds since 2007. Jackson's own calculations showed that when the 10-month average yield reached 4.72% and then rose, the global stock market began to decline.

Currently, this tipping point is still some way away — the 12-month average is around 4.34% — but Jackson said he has cut his stock positions and transferred some of his capital into government bonds to take advantage of attractive yields. “If US bond yields continue to rise, then there is a risk that the stock market will fall after 12 months,” he said.