The U.S. bond market faced a significant sell-off, with the 10-year U.S. Treasury yield approaching 5%, causing market turbulence

According to the Zhitong Finance APP, at the beginning of the new year, the severe sell-off in the world's largest bond market—the U.S. bond market—has attracted widespread attention from financial market investors. In the past week, U.S. Treasury yields have risen sharply, with the 10-year Treasury yield climbing to 4.796%, approaching the rare 5% mark since the global financial crisis.

Despite the fact that the 10-year yield has approached 5% multiple times in recent years, why has this time triggered such a significant market reaction?

Nicholas Colas, co-founder of DataTrek Research, stated: "The market is panicking over the 5% level of the 10-year yield because this number exceeds the general perception of interest rates held by an entire generation over the past 20 years. The last time the yield broke 5% was in mid-2007, and we all know what happened next."

According to FactSet data, the 10-year Treasury yield first broke 5% in June 2007, just five months before the onset of the Great Recession.

Colas added: "Of course, the situation in 2025 is completely different from that in 2007, with both positives—a more stable banking system—and negatives—a higher level of U.S. federal debt. However, market narratives often focus on simple and easily observable numbers, such as the 10-year Treasury yield."

Colas believes that the U.S. economy should be able to "withstand" a 10-year yield reaching 5%, but the stock market may be reluctant to test this assumption.

Last week, a series of strong U.S. economic data prompted traders to reassess the Federal Reserve's monetary policy outlook. The market began to consider that the Federal Reserve might need to delay interest rate cuts until the summer. This change in expectations had a heavy impact on the stock market.

According to Dow Jones market data, the S&P 500 index gave back almost all of its post-election gains last week, and the Dow Jones Industrial Average recorded its worst annual start since 2016.

Notably, the 10-year Treasury yield briefly touched the 5% threshold in October 2023, closing at 4.987% on October 19. However, the yield quickly retreated as traders questioned whether the Federal Reserve would keep borrowing costs elevated for a longer period.

At that time, the U.S. stock market also experienced a significant decline and only bottomed out a week after the bond market sell-off. Colas pointed out: "Although the yield subsequently fell back, stock investors were extremely concerned about interest rates rising so rapidly to such high levels."

Aside from the "brief" period in October 2023, Colas noted that over the past 20 years, the 10-year Treasury yield has remained "well below 5%." This is mainly due to sluggish economic growth following the Great Recession and the Federal Reserve's long-term bond-buying operations between 2008 to 2014 and 2020 to 2022.

On Monday of this week, most U.S. stocks closed higher, but technology stocks continued their decline from last week as Treasury yields remained elevated. Meanwhile, investors are awaiting key inflation data set to be released on Tuesday and Wednesday to better assess the likelihood of interest rate cuts by the Federal Reserve this year On Monday, the Nasdaq Composite Index fell by 0.38%, the S&P 500 Index rose by 0.16%, and the Dow Jones Industrial Average rose by 0.86%. The yield on the 10-year Treasury rose by 3 basis points to 4.802%, while the yield on the 30-year Treasury stood at 4.986%