Pimco warns that under technical selling pressure such as leveraged fund stop-loss sell-offs, the yield on the US 10-year Treasury bond may break 6% for the first time in 26 years.

Written by: Zhang Yaqi, Wall Street Insight

The world's largest bond fund, Pimco, has issued a warning that there is a risk of the US 10-year Treasury yield breaking 6%, which would be the first time this benchmark yield has reached this level in 26 years.

Pimco's Chief Investment Officer, Dan Ivascyn, stated in an interview with the Financial Times that it is "attainable" for the 10-year US Treasury yield to further rise significantly from the current level of 5.29%. He pointed out that the technical selling pressure, driven by leveraged investors such as hedge funds forced to liquidate after sustained losses in this $32 trillion market, is one of the key factors pushing yields higher. Ivascyn also warned that if the 10-year US Treasury yield rises to 5.5% or above, risk assets such as stocks and credit bonds will experience "rather significant declines."

This rise in yields has begun to impact the real economy. Data shows that as of the week ending October 8, the average rate on 30-year fixed mortgage loans in the US has risen to 7.4%, an increase of 12 basis points from the previous week, marking the highest level since 2023, putting additional pressure on American households just weeks before a critical midterm election.

Stop-loss selling creates a negative cycle

Ivascyn's warning echoes the widespread concerns among investors in the market lately. Several investors had previously issued warnings, suggesting that the US Treasury market is trapped in a "vicious cycle"—the ongoing wave of selling is pushing yields to new highs, which in turn forces more market participants, such as real estate investment trusts, to follow suit and sell bonds, further intensifying selling pressure.

Ivascyn explicitly stated that a significant portion of recent market activity is directly related to "negative technical factors" and "stop-loss operations by platform hedge funds and other leveraged investors." He indicated that from a short-term trading perspective, breaking through 6% in yields "is certainly a possibility."

The current yield on the US 10-year Treasury bond is at its highest level since the early 2000s, driven by factors including inflation concerns sparked by the Trump-Iran conflict, a surge in corporate debt financing in AI companies, and expectations of strong economic growth in the US. The inflation environment is particularly unfavorable for bonds, as they offer investors fixed income streams.

Risk assets under pressure, concerns emerge in the private market

Ivascyn warned that further rises in US Treasury yields will pose a shock to risk assets. Although US stock indices are still near historical highs, the negative impact of high yields on some companies has begun to surface—this month, the borrowing cost for bonds rated the lowest has risen to 17%, the highest level since May 2020, due partly to rising Treasury yields and partly to investors demanding higher risk premiums.

Outside the public market, Ivascyn anticipates that higher Treasury yields will also "slowly" trigger issues in the private market, especially in the commercial real estate sector, which he highlighted as having "a lot of still fragile capital structures and weak fundamentals."

High yields may self-correct, overseas bond markets present opportunities

However, Ivascyn also pointed out the intrinsic balancing mechanisms to rising yields. He suggested that as yields continue to rise, investors will gradually shift more asset allocations to US Treasuries to lock in high returns, which will become a "limiting factor for further upward yield movements." This week, the auctions for 10-year and 30-year US Treasuries received strong demand, showing early signs of this trend.

Regarding overseas markets, Ivascyn believes there are more attractive alternative options. He stated that Pimco "is not as concerned about the ability of the US to maintain current deficit levels as some might be," but emphasized that "there's no need to solely hold US bonds." He cited the investment value of Australia's "high-quality credit" bonds and noted that despite facing "its own challenges," UK bond yields are still higher than those in the US. The Canadian and German markets—especially when denominated in dollars—also offer "very attractive yields and better initial fiscal conditions."