Hedge Funds Forced to Sell to Cut Losses, U.S. 10-Year Treasury Yield May Break 6%

Pimco warns that under technical selling pressure, including leveraged funds cutting losses, the U.S. 10-year Treasury yield may break 6% for the first time in 26 years.

Written by: Zhang Yaqi, Wall Street Insights

The world's largest bond fund, Pimco, has issued a warning that there is a risk of the U.S. 10-year Treasury yield breaking 6%, which would mark the first time this benchmark yield has reached this level in 26 years.

Pimco's Chief Investment Officer, Dan Ivascyn, stated in an interview with the Financial Times that a significant rise in the 10-year Treasury yield from the current level of 5.29% is "achievable." He pointed out that in recent weeks, leveraged investors such as hedge funds have been forced to cut losses in this $32 trillion market, and this technical selling pressure is one of the key factors driving yields higher. Ivascyn also warned that if the 10-year Treasury yield rises to 5.5% or above, risk assets such as stocks and credit bonds will experience a "considerable decline."

This round of rising yields has begun to impact the real economy. Data shows that as of the week ending October 8, the average rate for a 30-year fixed mortgage in the U.S. rose to 7.4%, an increase of 12 basis points from the previous week, marking the highest level since 2023, putting additional pressure on American households just weeks before the crucial midterm elections.

Stop-Loss Selling Creates a Negative Cycle

Ivascyn's warning echoes the widespread concerns among investors in the recent market. Several investors have previously warned that the U.S. Treasury market is caught in a "vicious cycle"—the ongoing wave of selling pushes yields to new highs, which in turn forces more market participants, such as real estate investment trusts, to sell bonds, further exacerbating the selling pressure.

Ivascyn explicitly pointed out that a significant portion of recent market activity is directly related to "negative technical factors" and the stop-loss actions of "platform hedge funds and other leveraged investors." He stated that from a short-term trading perspective, a yield break above 6% "is certainly possible."

Currently, the U.S. 10-year Treasury yield is at its highest level since the early 2000s, driven by factors including inflation concerns stemming from the Trump-Iran conflict, a surge in borrowing by AI companies, and market expectations of strong economic growth in the U.S. The inflation environment is particularly unfavorable for bonds, as they provide fixed income streams to investors.

Risk Assets Under Pressure, Concerns in Private Markets Emerge

Ivascyn warned that further increases in U.S. Treasury yields will impact risk assets. Although U.S. stock indices are currently still near historical highs, the negative effects of high yields on some companies are already becoming apparent—this month, the borrowing costs for bonds of companies with the lowest credit ratings rose to 17%, the highest level since May 2020, due to both rising Treasury yields and investors demanding higher risk premiums.

Outside the public markets, Ivascyn predicts that higher Treasury yields will "slowly ignite problems" in the private market, particularly in the commercial real estate sector, which he noted has "a large number of still fragile capital structures and weak fundamentals."

High Yields May Self-Correct, Opportunities in Overseas Bond Markets

However, Ivascyn also pointed out the inherent balancing mechanism of rising yields. He believes that as yields continue to rise, investors will gradually shift more asset allocations to U.S. Treasuries to lock in high returns, which will become a "limiting factor for further yield increases." This week, both the 10-year and 30-year Treasury auctions in the U.S. received strong demand, indicating early signs of this trend.

In overseas markets, Ivascyn sees more attractive alternative options. He stated that Pimco "is not as worried about the U.S. maintaining its current deficit levels as some might think," but emphasized that "there is no need to hold only U.S. bonds." He cited the investment value of Australian "high-quality credit" bonds and noted that despite the challenges faced by the UK, its bond yields are still higher than those in the U.S. The Canadian and German markets—especially when denominated in U.S. dollars—also offer "very attractive yields and better initial fiscal conditions."

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