"The artificial intelligence bubble may burst, causing panic among US stock investors... The US Treasury yield has exceeded 5%, hitting a new high since 2007, and 'it may soon break 6%', with the Federal Reserve being the key variable."

Since the era of the US stock market dot-com bubble, 5% has long been the upper limit of the fluctuation range of US Treasury yields. Recently, Ruchir Sharma, Chairman of Rockefeller International, warned in a column published in the UK's Financial Times that "once this yield breaks through 5%, the AI bubble is likely to burst."

Right after the warning, in the early New York trading session this Monday, the 10-year US Treasury yield fluctuated higher all the way, once hitting 5.012% during the session, the first time since October 2023, before pulling back slightly to close at 4.960%. On Tuesday, amid intensified sell-off in US government bonds ahead of the Federal Reserve's interest rate decision, the 10-year US Treasury yield rose above 5% again to 5.02%, the highest level since 2007.

By the close of Monday, the three major indices of the US stock market fell collectively; the semiconductor and memory chip sectors slumped, with ARM down more than 9%, SK Hynix down more than 7%, and Micron Technology and Intel down more than 5%.

"This is a yield that the financial market cannot afford"

Why does the 5% yield make investors so scared? According to a report by Business Insider on September 14 local time, Padhraic Garvey, Head of Americas Research at ING, pointed out that there is no inherent catastrophe in this number itself, but the reason why 5% has become a remarkable level is mainly because the 10-year US Treasury yield has rarely broken through this threshold in modern history.

The last time the 10-year US Treasury yield broke through the 5% mark was in October 2023. Earlier, the yield exceeded 5% in April 2007, just a few months before the outbreak of the global financial crisis.

"Traders focus on round numbers, and breaking through 5% means the next stop could be 5.5% and 6%," said José Torres, Senior Economist at Interactive Brokers. "And in the post-financial crisis economy, this is a yield that the financial market cannot afford."

Torres added, symbolically, the 5% yield also indicates that the market has entered an environment where high interest rates are more persistent.

Torres said that the 20-year and 30-year US Treasury yields have previously broken through 5%, but the 10-year US Treasury yield has the most direct impact on borrowing costs such as mortgages and corporate loans, so it is often more "weighty" in the eyes of investors.

The market also believes that higher borrowing costs are negative factors themselves. Garvey said that the 10-year yield touching 5% will immediately draw attention to higher corporate financing costs.

According to data from Freddie Mac, the US housing finance agency, the average 30-year fixed mortgage rate in the US last week was 6.76%. This rate has risen by 60 basis points this year, moving in tandem with the 76 basis point increase in the 10-year Treasury yield.

Last week, the effective yield of the ICE BofA US High Yield Index also rose to 7.42%, up 89 basis points since the beginning of this year. This indicator mainly reflects corporate borrowing costs.

The "danger zone" for the stock market

Historically, higher yields have also raised investors' concerns that higher interest rates will hit risky assets such as stocks.

According to the aforementioned Business Insider report, HSBC said in a report to clients earlier this year that in terms of its impact on the stock market, the yield is firmly in the "danger zone".

Garvey pointed out that the 10-year US Treasury yield breaking through 5% will definitely put pressure on risky assets, and it may lead to a decline in the risky asset space. He also noted that the speed of the yield rise has a greater impact on the stock market than the actual yield itself, adding that the speed of the 10-year yield rising from 4.5% is worrying.

Although the US stock market has given up part of its gains due to the rise in US Treasury yields, analysts believe the outlook is still not optimistic.

Torres added that the yield touching 5% has also intensified investors' concerns: Treasury bonds will start to compete with corporate bonds, which may have a negative impact on the AI boom that is largely debt-financed. Higher borrowing costs may distort the economics of AI companies' large-scale investment in this technology, while investors are already worried about the returns of soaring capital expenditure.

He said: "AI companies need so much money to build infrastructure that they are actually competing with the US Treasury for fixed income investors."

Torres said that US Treasuries are currently under huge selling pressure due to fiscal and inflation problems. He speculated that at this point, the scenarios that can substantially push down yields are a long-term settlement of the Iran war, or the Federal Reserve starting large-scale quantitative easing, such as adding about $50 billion of Treasuries to its balance sheet.

"It could climb to 6% in the near future"

Garvey believes that the 10-year US Treasury yield could climb to 6% in the near future, which will be the highest level for the 10-year yield since 2000.

When talking about this risk scenario, he said: "The dangerous period of rising from 5% to 6%, if it happens in the next few months, will be quite difficult for the market."

According to a Bloomberg report on the 14th local time, Steven Barrow, G10 Strategy Head at Standard Bank London, raised his year-end forecast for the 10-year US Treasury yield to 5.2%, and expects it to reach 5.3% in the first quarter of 2027. Steven predicted in February this year that the yield would reach 5%, which was completely different from market expectations at that time.

Barrow said: "My structural view is that we will be in a period where high interest rates will last for a long time. The reason why I am convinced that the yield will exceed 5% is that the yield has approached 5% even when the inflation data does not far exceed expectations."

A key variable is how the Federal Reserve will respond under the leadership of Chairman Kevin Warsh. Barrow said: "If the Fed does not start to take action, then we will face more serious problems."

On Tuesday local time, the Federal Reserve will start a two-day interest rate meeting. The market expects that the possibility of the Fed raising interest rates by 25 basis points is high, because the inflation rate in August is still far higher than the Fed's 2% target.

According to the CME FedWatch Tool, traders believe that the possibility of the Fed raising interest rates by 25 basis points at this meeting exceeds 92%.

According to a CNBC report, Jonathan Liang, Chief Investment Officer for Fixed Income & FX at Standard Chartered, said: "The US 10-year Treasury is highly sensitive to inflation expectations, and current inflation indicators are still above the Fed's 2% target, so we believe this close correlation may continue for some time."

A Bloomberg report on the 15th local time pointed out that the pressure in the bond market has intensified the tensions ahead of the Fed's interest rate decision. Investors expect Fed officials to raise short-term borrowing costs for the first time since July 2023. If the Fed fails to deliver on its commitments, or Kevin Warsh hints that monetary tightening in the next few months will be less than expected by the money market, bond investors may demand higher yields to hedge against inflation risks.

This article is from the WeChat official account "China News Finance" (ID: jwview), written by Luo Kun, edited by Li Xiaoxuan, reviewed by Xue Yufei and Chang Tao, and authorized for release by 36Kr.