Invest5 publishers3 min readPublished
A 2.9 basis point day carried the 10-year over 5% for the second time since 2007
Brent near $108 and futures pricing a 92.3% chance of a Fed hike took the 10-year to 5.014% intraday. Capital Economics says the United States is not in a fiscal crisis yet because nominal growth still beats debt service.
The Investor · Invest desk
What happened
- It was the first intraday crossing of 5% since October 2023 and only the second since 2007, the year before the global financial crisis.
- November Brent crude futures rose to about $108 a barrel after Saudi Arabia shut its East-West Pipeline, the route that moved crude around the Strait of Hormuz.
- CME's FedWatch tool showed federal funds futures putting a 92.3% probability on a quarter-point hike at the Sept. 15-16 FOMC meeting, up from 87.3% a day earlier.
- The two-year yield reached 4.679% and the 30-year, a reference for mortgage rates, 5.386%, and both pulled back later in the session as bargain hunting emerged.
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Why it matters
- contradiction Fortune's sources treat 5% as the level that pops the AI trade, while Wolf Richter says 5% was normal to low before 2008, so the same print supports opposite readings of whether it is a ceiling or a resting place.
- constraint Sharma's channel puts a financing test on hyperscaler capex that has nothing to do with chip demand: fewer bonds issued, and new equity harder to sell above 5%.
- decision The FOMC has to decide this week whether it can look past a supply shock, and Shearing says years of above-target inflation have made that harder to justify.
- cost Mortgage borrowers meet this repricing before any AI bond deal does, through a 30-year yield sitting 37.2 basis points above the 10-year.
Two point nine basis points is the day's whole move: the 10-year reached 5.014%, up 0.029 percentage point from the previous session [3]. The run it finished is much larger. Fortune dates the surge to just before the Iran war began in late February, when the yield was below 4%, so the crossing supplied under 3% of a move of more than 100 basis points [11][6]. Ruchir Sharma, chairman of Rockefeller International, set his warning in a Financial Times op-ed at a 10-year that "decisively breaches" 5% [21]. This print went 1.4 basis points past the number and came back [3][4][8].
The previous run at the level is the reason to be careful with the word threshold. Wolf Richter dates it to Oct. 23, 2023, when the yield hit 5.02% after a six-month surge of 170 basis points, and then buyers arrived: down 19 basis points intraday to 4.83%, and 3.79% by year-end [26]. That is a fall of 1.23 percentage points in about ten weeks [3]. Bloomberg counted a single day in all of 2023 on which the 10-year closed above 5%, according to Seoul Economic Daily [6]. "But that 5% is not high when compared to periods before the Fed's financial repression wrecked the bond market," Richter wrote [27].
Wednesday's hike is close to fully priced. CME's FedWatch put the probability of a quarter-point move at the Sept. 15-16 meeting at 92.3%, against 87.3% a day earlier [9]. The odds against a hike went from 12.7% to 7.7%, about two-fifths of what was left [4]. Some on Wall Street see three hikes in total [19], 75 basis points at that increment [5]. The two-year sat at 4.679%, 33.5 basis points below the 10-year [4][2].
The feedback loop under discussion is a conditional. Neil Shearing, group chief economist at Capital Economics, said in a Monday note that "in a world of high public debt and large fiscal deficits, there is a potential feedback loop through the bond market that could make a difficult situation considerably worse" [16], and he added that the US is not there yet, because nominal GDP growth still outpaces the cost of servicing the debt [17]. None of the three accounts puts a dollar figure on federal debt service. Sharma's version of the same point starts from a debt burden above 100% of GDP: "As a result, debt-servicing costs are much higher now," he wrote [23][24].
Oil is not the only source of the selling in these accounts. Seoul Economic Daily lists price indexes running well above the Fed's 2% target, the federal budget deficit and heavy corporate bond issuance tied to AI infrastructure alongside the war [10]. Sharma expects hyperscalers to issue fewer bonds at these yields and to find new equity harder to sell [22]. Part of the supply pushing yields to 5% is AI borrowing, and 5% is the level Sharma says curtails it.
I'd expect the level to draw buyers again before it closes that funding channel, because it did in 2023 [26] and because Wednesday is already 92.3% priced [9]. The counter is serious: the 2023 rally ran toward a Fed that would soon be cutting, and the path some see now is three hikes [19]. I'd be wrong if the 10-year holds above 5% through the decision and a hyperscaler pulls or reprices a bond deal. Monday's tech selloff was led by chipmakers [25].
What to watch
- Whether tanker traffic through the Strait of Hormuz recovers and the East-West Pipeline restarts, with US oil reserves already the lowest in over 40 years.
- Whether the 10-year records a daily close above 5%; Bloomberg counted one such close in all of 2023.
- Whether Shearing's condition flips, meaning nominal GDP growth falling below the cost of servicing the debt.