Is a new wave of sell-offs approaching? The ultimate rival of the AI bull market emerges—The "global anchor of asset pricing" breaks through the 5% super threshold

On September 14, the yield on the 10-year US Treasury, known as the “anchor of global asset pricing,” surged to an intraday high of 5.012% before retreating to 4.960%. In the early Asia session on September 15, the 10-year Treasury yield once again broke through the critical 5% threshold. Following this renewed breach of the crucial 5% level, there is a higher probability for a period of protracted tug-of-war at these elevated yields and accelerated asset performance divergence—especially since, before the energy shock and the US’s rapidly expanding fiscal deficit have clearly abated, the conditions for a rapid replication of the sharp yield decline seen at the end of 2023 are not yet sufficient.

US fiscal deficits continue to expand, and interest expenses are hitting new all-time highs—with net interest payments by the US Treasury surpassing $1 trillion for the first time ever in the first eleven months of the current fiscal year. Compounded by intensifying geopolitical tensions in the Middle East driving up oil prices and reinforcing expectations for Federal Reserve rate hikes, the 10-year Treasury yield has finally been pushed to the critical 5% mark.

As market debates rage between a “2023-style brief peak and smooth retreat” for the 10-year Treasury yield and a “2000s-style financial crisis,” what investors really need to judge is whether the Fed will begin a new rate hike cycle and how long high rates will persist, as well as whether corporations and financial institutions can cope with higher financing costs using cash flow—and even whether the US Treasury can continue “borrowing new to repay old” under persistent high rate pressure.

What investors should be especially vigilant about is the scenario where yields on 10-year and longer Treasury securities remain elevated for a prolonged period, causing global stock market valuation pressures to gradually translate into real, intensifying debt servicing stress. The FOMC decision on September 16 will be a key inflection point for testing this trend. For the global equity bull run sparked by the AI investment boom since 2023, persistently and continuously rising 10-year Treasury yields could be considered “the strongest adversary” for global equities.

The 10-year Treasury is called the “anchor of global asset pricing” because of its benchmark status in the dollar funding system and medium-to-long-term cash flow valuations. The US Treasury market is massive and highly liquid, and the dollar is widely used for international financing and reserves, so its yield changes have cross-market impacts—USD corporate bonds usually reference similar-tenor Treasury yields plus credit spreads, mortgage rates are influenced by Treasury and MBS pricing, and the valuations of stocks and real estate are highly sensitive to the discount rate on future cash flows. When this benchmark rises while earnings and rental expectations do not improve in tandem, asset prices face downward pressure. The impact also transmits overseas via dollar funding costs, FX hedging, and cross-border capital flows; the currency, tenor, and credit risk specifics determine how much particular assets are affected.

Theoretically, the 10-year Treasury yield corresponds to the risk-free rate “r” in the denominator of the key DCF valuation model used in the equity market. When other factors (especially anticipated cash flows in the numerator) do not materially change—for example, during earnings season with no positive catalysts for the numerator—a higher denominator or continued operation in the historically extreme high 5%+ zone means high-valuation risk assets like tech stocks closely tied to AI, high-yield corporate bonds, and cryptocurrencies could face a valuation collapse.

If the Federal Reserve resumes rate hikes, can it stabilize long-dated US Treasuries of 10 years or longer? Behind the 25-basis-point hike expectation is the Fed’s “credibility battle.”

The current macro backdrop supports the Fed’s cautious stance while allowing room for limited adjustment. In August, US CPI rose 3.4% year-over-year, core CPI was up 2.4% YoY, but the month-over-month core rose from 0.2% in July to 0.3%. Non-farm payrolls increased by 162,000 and unemployment held at 4.1%. This means that inflation improvement remains uneven, and employment does not yet put obvious pressure on policymakers to turn dovish immediately. The aftereffects of the energy shock will depend on whether they continue to spread via transport costs, corporate pricing, and wage negotiations.

While rate hikes can restrain demand and anchor inflation expectations, increasing oil supply and alleviating shipping disruptions require more complex factors—geopolitical conditions more intricate than monetary and fiscal policy alone. This supply shock has produced a scenario combining elevated inflation expectations and strong employment, meaning there aren’t enough clear catalysts for Treasury yields to decline quickly and sustainably.

The most likely market-moving information from this FOMC meeting is the policy path after the rate hike. Ahead of the meeting, market snapshots show an 88% probability for a 25-basis-point hike implied by Fed funds futures; if realized, the target range will rise from 3.50%—3.75% to 3.75%—4.00%. While the high odds reduce the surprise from any single hike, they don’t eliminate the risk of further tightening ahead.

In the eyes of some veteran Wall Street analysts, a more digestible path for the market is a small rate hike combined with a clear data-dependent stance—helping investors interpret it as a limited, moderate policy adjustment to guard against inflation’s resurgence. If the dot plot and press conference further indicate a higher, longer-lasting policy rate, companies and valuations will have to reprice for a higher rate path, and the pressure will far exceed a one-off 25-basis-point increase.

It’s possible for rates to rise while long-term yields fall—the key is policy credibility. Long-term Treasury yields are roughly based on the average expected nominal short-term rates in coming years plus a term premium—the latter compensates for the extra risk of holding long-term bonds.

If a rate hike boosts market confidence in controlling inflation and reduces worries about medium- and long-term inflation, future rate hikes, and volatility, the return required by long bonds might go down. Conversely, if policy explanations disconnect from economic data and investors start doubting the Fed’s independence, long-term borrowing costs may rise even if short-term rates are unchanged.

Fed Chair Walsh, nominated by Trump, must show that decision-making is consistent with inflation and employment mandates. Whether limited tightening can translate into more stable long-term expectations will determine whether this hike stabilizes the markets.

“I keep asking myself: ‘What could possibly catalyze a drop in yields?’ Besides the traditional recession, it’s really hard to find other factors,” said Greg Peters, Co-CIO of PGIM Credit, in an interview. “The conditions for yields to remain high or even go higher are fully in place.”

Zach Griffiths, Head of Investment Grade and Macro Strategy at CreditSights, noted, “A broad set of underlying factors have combined so that rising rates face the least resistance right now.” He added that the 10-year Treasury yield could surge to 5.5%.

TD Securities strategists led by Gennadiy Goldberg said that, given the market has already priced in much of the Fed’s hawkish pivot, yields are unlikely to spiral out of control solely because of rate hikes, but unless the economy weakens, long bond yields overall should stay elevated through 2027.

Mike Bell, Market Strategy Head at RBC BlueBay Asset Management, also believes bond selloffs could worsen if oil prices continue to rise. “It’s still far too early to call the top in bond yields.”

For equity bulls, the relatively ideal scenario is the 2023-style “10-year Treasury yield peaks smoothly and retreats”

Meanwhile, Standard Bank’s G10 Strategy Chief, Steven Barrow—a market veteran who correctly predicted a 5% 10-year yield earlier this year—has once again issued a bearish call on bonds.

Barrow raised his year-end forecast for the 10-year Treasury yield to 5.2% and expects it to reach 5.3% in Q1 2027. “Structurally, I believe we’re in a ‘higher for longer’ rates environment,” Barrow said. “One factor that convinces me yields will break 5% is that they’ve already gotten close to 5% even before any major inflation surprise.”

Given that the Fed faces political pressure from President Trump to cut rates, how Chair Kevin Walsh will respond during his tenure is a key variable. Barrow expects the Fed to hike in September, again in December, and then hold short-term rates steady until the end of 2027.

“If the Fed doesn’t act, we’ll face even more severe economic and market problems,” Barrow said. “Given persistent instability in the Middle East, I still see all signs pointing to higher inflation.”

For stock investors hoping for a “2023-style, smooth peak and retreat”—the optimism that fueled the last global bull market—a repeat would require both fundamentals and policy expectations to align. Back then, the 10-year yield nearly reached 5% in October and then dropped below 4% by year-end as inflation and monetary policy prospects were reassessed.

Now, the debate centers on whether another round of rate hikes is needed as the policy landscape differs markedly from back then. For a repeat of bond rallies and risk assets benefiting concurrently, cooling energy prices, a better trend in core inflation, as well as resilient employment and earnings are needed. A single-day retreat from 5% merely shows buying interest at that level; it’s not enough to confirm a lasting downward trend. Should yields eventually fall due to recession, the resulting earnings and credit deterioration could nullify the positive impact of a lower DCF discount rate—meaning stock and bond performance could diverge sharply from late 2023.

From Treasury’s mountain of debt to the AI infrastructure financing frenzy: Cash flow will determine who can withstand high rates

Fiscal financing pressures could keep rates higher for longer than the market hopes. With US federal debt surpassing $40 trillion, the variables affecting yields now include new deficits, refinancing demand, bond maturity structure, and investors’ willingness to buy long-term Treasuries at given prices.

As low-coupon debt matures and is rolled over at higher rates, the government’s interest burden will gradually climb. If budget gaps remain large, the market will have to keep absorbing more bonds. Treasury buybacks can improve liquidity in off-the-run issues and smooth cash and issuance management, but their effect depends on the structure of accompanying financing—it can’t substitute for fiscal rebalancing. Even if the Fed tames inflation expectations with a single hike, long-term bond supply and required term premiums could still limit how much yields decline.

The flip side of the “2023-style smooth yield peak and retreat”—that is, a “2000s-style bear market crisis triggered by steadily rising 10-year Treasury yields”—offers lessons on how losses propagate through leverage and financing chains. Back then, falling real estate prices and mortgage losses spread to systemic stress via securitized products, leveraged financial institutions, and short-term funding dependence. The risk transmission path to watch this time is elevated interest costs eroding borrower cash flows, tighter refinancing conditions, and collateral value declines triggering margin calls and forced asset sales.

To gauge whether risks are rising, watch credit spreads, debt rollover conditions, and short-term funding markets. A 5% Treasury yield doesn’t itself signal crisis; only when cash flow gaps can’t be met by normal funding does rate pressure morph into credit events. Should risk aversion surge, yields on 10-year+ Treasuries could even fall—but risk assets would suffer larger losses.

For the 10-year+ Treasury curve, the more critical structural force is the “fiscal deficit + AI bond issuance” competition for global duration capital pools: US Treasury supply is nearing $40 trillion, with a FY2026 deficit forecast at around $1.9–2.1 trillion. At the same time, AI-related issuance is now close to 15% of this year’s investment-grade bond volumes. Goldman Sachs says Google parent Alphabet and Amazon (the AI Hyperscalers) have issued about $194 billion in bonds this year alone, and could add up to about $250 billion in direct financing by 2026.

In a broader context, Alphabet, Amazon, Meta, and other AI Hyperscalers have issued nearly $220 billion in bonds so far this year—more than double the $108 billion for all of 2025. By available data, this is a record pace for this period or a “historic high in comparable periods.”

The unprecedented AI investment wave building computational infrastructure could extend economic resilience, but will also amplify differences in corporate funding capabilities. The Fed’s July statement still described capital investment and productivity growth as robust, offering some tolerance for higher rates. Cash-rich tech giants may continue to build out their strategic computing base—sustaining demand for chips, power, and data centers—while projects reliant on borrowing, leasing, and continual fundraising will be more vulnerable to interest and refinancing constraints.

If AI capital expenditures remain strong but gains in productivity have yet to fully lower costs, investment demand could temporarily delay high rates from fully dampening aggregate demand. This suggests the AI infrastructure chain is likely to see further differentiation driven by funding access and the quality of receivables—in other words, sustained growth in orders, capital expenditures, and free cash flow must be continuously reviewed and tested.

This logic—around the long-term AI revenue curve and whether cash flows are robust—also explains why US cloud giants outperformed the Philadelphia Semiconductor Index on Monday. Core Hyperscalers in this infrastructure boom bucked the trend on Monday: Alphabet rose over 3%, Microsoft was up 1.97%, and Meta gained around 2.7%. Although Amazon closed down 1.26%, its defense was much better than most chip stocks, thanks to its strong cash flow and ability to keep earning ROIC from completed facilities.

In the coming weeks, the more useful framework will be to watch Treasury yields, credit spreads, and earnings expectations together. If moderating inflation brings yields down while credit spreads stay stable and earnings forecasts remain resilient, the “2023-style top” will be better supported—benefiting long-duration government bonds and high-quality growth assets. If real rates and term premia remain high, the edge will go to cash flow-rich, low-leverage, low-near-term refinancing needs assets. If falling yields are accompanied by widening credit spreads, it will be important to prioritize identifying recession and funding stress. Asset selection in a high-rate environment is likely to precede any macro cycle turn. The true test is who can turn growth into cash flows that pay interest, service debt, and reinvest—that’s who will best withstand the anchoring of global pricing at higher levels.