Bond market sell-off continues! If the 10-year US Treasury yield reaches 5%, could it trigger a 10% pullback in US stocks?

According to Markets Pulse's latest survey, the escalating bond sell-off is pushing US Treasury yields to levels that could deliver a significant blow to the stock market.

Among the 122 respondents in the survey, about 30% believe that a 10-year US Treasury yield reaching 5% to 5.25% would be enough to trigger a stock market drop of more than 10% from its peak—which would meet the definition of a technical correction; an additional 22% set the trigger threshold slightly higher at 5.25%–5.5%.

On Thursday, the benchmark 10-year US Treasury yield briefly climbed above 4.98%, marking a three-year high. The conflict ignited by President Trump in the Middle East drove oil prices well above $100 per barrel, exacerbating inflation shocks and sharply increasing the risk of Federal Reserve intervention.

“People tend to think we’re on the verge of a long-awaited stock market correction, as hard economic data and central bank policy are giving risk-taking investors a reality check,” said Joseph Brusuelas, chief economist at RSM.

With the November midterm elections approaching, Treasury yields—as a key benchmark for funding costs in the broader economy and stock valuations—have become a growing concern for the Trump administration. Survey participants listed accelerating price pressures and fiscal worries as the biggest threats facing Treasuries in the next six months.

Since Trump began bombing Iran at the end of February, this key yield has climbed a full percentage point, now hovering just below the nearly 5% peak reached at the end of 2023. At that time, the Federal Reserve had just ended its rate hike campaign aimed at curbing post-pandemic inflation surges.

This round of rising yields is happening as traders anticipate that the Fed could raise rates again as soon as next week. New chair Walsh is under pressure to demonstrate he is prepared to deliver on the Fed’s commitment to rein in inflation—which has exceeded the Fed’s target level since 2021.

However, over 80% of survey participants believe that even if Walsh does lead the Fed in another rate hike, it will be a one or two-off adjustment in the current cycle, not the start of a new, broader tightening cycle.

So far, robust corporate earnings have, to some extent, offset the impact of rising interest rates. Although the S&P 500 index has fallen 2% over the past four days, it remains not far from its record high set last month.

Global borrowing costs have been rising due to factors including swelling government deficits and a surge in debt issuance aimed at funding AI investments, testing the market’s capacity to absorb such massive debt loads.

But inflation has remained the key driver. On Thursday, the US Department of Labor reported that wholesale prices in August grew more than 5% year-over-year—this even before the recent spike in oil prices. The Department of Labor will release consumer price index data on Friday.

A disorderly bond sell-off would pose the biggest risk. When asked what might trigger a crisis deep enough to force a response from Washington, more than two-thirds of respondents said the speed of the yield rise is more critical than the absolute level itself.

“The 10-year yield looks set to test the 2023 cycle high of 4.99%, and a new high would put more pressure on stocks,” said Andrew Graham, partner at Jackson Square Capital. “However, from the perspective of equity risk, the speed of yield increases is far more important than the level itself.”

Sustained expansion in corporate profits and strong capital inflows into the AI sector—two factors that have long supported US stock valuations—continue to underpin the market.

Macro strategist Tatyana Dery notes: “The amount of pressure on stocks depends on how long rate volatility lasts. Focusing solely on yield levels may overstate the threat to equities, as real profit growth is currently providing solid support.”

Yes Securities analyst Hitesh Jain states that based on analyst expectations, S&P 500 earnings growth in the coming year is about 35% or even higher. He notes that the key risk lies in these profits failing to materialize.

“As long as corporate earnings continue to grow at a robust compounded pace, the stock market should be able to absorb structurally higher risk-free rates,” he wrote.

At the same time, some institutions forecast that Treasury yields may not reach levels that would drag down the stock market. Stratagists at Sumitomo Mitsui Banking Corporation wrote: “We believe the 4.80%–5% range may be the short-term peak for 10-year Treasury yields in the coming months. There are signs that global demand for bonds may emerge at these more attractive yield levels.”