The Next Key Threshold for 30-Year Treasury: 5.5%

The psychological threshold of 5% has become history, where is the bond market's next battlefield? Citigroup has provided the answer: 5.5%.

Citigroup's London-based macro interest rate strategist Jim McCormick said that as the 30-year U.S. Treasury yield climbed to 5.16% this week, approaching the highest level since 2007, the market focus is likely to turn to the new "round number threshold" of 5.5%.

In an interview in Singapore, he pointed out that investors' calculations for buying long-term U.S. Treasuries on dips have been disrupted - there is no sign of slowing core inflation, and the resilience of the U.S. economy in the global energy crisis is expected to outperform other developed market peers.

"Buy the dip" logic has been overturned

Previously, 5% was widely regarded by the market as the value trough for long-term U.S. Treasuries, attracting buyers once touched. However, the persistent rise in this round of yields has rendered this logic ineffective. Barclays and BNP Paribas have warned one after another that against the backdrop of sustained high energy prices and persistent inflation expectations, this round of bond market selling may not have ended.

The pricing changes in the interest rate derivative market are more intuitive. The swap market has already priced in a 25 basis point rate hike by the Federal Reserve in March 2027 - before the outbreak of the Iran war at the end of February this year, the market was betting on rate cuts. McCormick judged more aggressively: "I think the market underestimated the risk of the Fed starting rate hikes within this year."

Global bond markets are under pressure synchronously

The repricing of inflation expectations is not a story unique to the United States, but resonates globally.

This week, the yield on German 30-year government bonds rose to the highest level in 15 years; the yield on Japanese bonds of the same duration set a new high since the first issuance of the product in 1999; in the UK, fiscal concerns surrounding the leadership challenge of Prime Minister Keir Starmer continue to linger in investors' minds.

Stock market and credit market face potential impact

Risk assets are still holding on. The MSCI developed market stock index has rebounded by more than 10% from the low point in March, and the continuation of the Iran war has not interrupted this rebound.

But McCormick issued a clear warning: "The biggest risk facing the global economy is the magnitude of the impact of global bond yield shocks. If long-term U.S. Treasury yields continue to rise, it will create a quite unstable equilibrium for risk assets such as stocks and credit."

In other words, how far this bond market storm can go will determine how long this round of risk asset rebounds can last.