The 10-year Treasury yield just hit 5%. How income investors can profit

The US 10-year Treasury yield broke past the 5% threshold for the first time since 2023 on September 14. This milestone comes amid growing inflation concerns and increased borrowing demands from both governments and corporations. The yield, which is a key benchmark for US mortgages and global bonds, jumped nearly 5 basis points to 5.01% before somewhat receding.

The 5% mark is considered a psychological level for investors, potentially signaling a buying opportunity. The initial surge was driven by surging crude prices and concerns about inflationary pressures as the Federal Reserve prepares to make a decision this week.

Bond prices declined globally, with UK and German debt also falling as Brent crude prices approached $110 a barrel. However, the yield pulled back to around 4.99% by late morning on September 15. BlackRock's largest long-duration US Treasury fund touched its lowest intraday level since it was launched in 2002. This rise in the 10-year yield poses risks of slowing economic growth and negatively impacting high-valued equities.

US Treasury Secretary Scott Bessent has taken steps such as boosting bond buybacks, suggesting Japan reduce Treasury sales, and potentially cutting long-maturity debt issuance. However, these measures have had little effect, with the sell-off accelerating further. With less than two months remaining until the US midterm elections, the 10-year yield is now about a full percentage point higher than before the Iran war began.

August's hotter-than-expected consumer-price data has fueled traders' bets for Fed interest-rate hikes starting as early as September 16.

The sell-off also indicates broader structural factors pushing up long-dated yields across major developed markets. The global government borrowing costs gauge has climbed to 2007 levels, as governments and companies vie for capital amid ballooning fiscal deficits and increased issuance for AI infrastructure. CreditSights' Zach Griffiths predicts the yields could climb toward 5.5%.

The ballooning Treasury market, now worth around $32 trillion, has pushed federal debt to over 100% of US GDP. Fitch Ratings warned in August that the U.S. is vulnerable to future economic shocks as debt grows. The last 10-year yield above 5% occurred in October 2023, when the market quickly bounced due to a cooling labor market and easing inflation.

This time, however, a robust labor market keeps investors focused on persistent inflation and the possibility of higher borrowing costs remaining for an extended period.