Here's how Treasury yields could rise to 6% - even without market upheaval

By Joy Wiltermuth

The bond market will be closed on Monday for Columbus Day, but the stock market will operate normally

Monday, Oct. 12, is Columbus Day, and the bond market will be closed.

A short but important week is ahead for the U.S. bond market, which will be closed on Monday, Oct. 12, for Columbus Day.

Big banks will kick off quarterly earnings on Tuesday, even though the stock market will operate with normal hours on Monday. The consumer-price index for September comes out midweek and an important survey for the Treasury market is due at noon Eastern time on Friday.

A key question facing the $32 trillion Treasury market is whether additional heavy selling could suddenly spark an unwinding that pushes the yield on the benchmark 10-year Treasury note to 6%.

Yields have kept climbing despite Treasury Secretary Scott Bessent's surprise announcement in August of a series of increased buybacks of long-dated Treasurys through early November, which was aimed at calming the market.

On particularly volatile days, strategists and bond managers have expressed concerns about the risk of long-dated Treasury yields becoming unhinged. That hasn't happened.

Traders instead note the market's relative smooth, if jittery, functioning, despite the 10-year note BX:TMUBMUSD10Y closing September with its biggest quarterly jump since 1994.

To start October, the S&P 500 SPX and Nasdaq Composite COMP hit fresh record highs, even as the 10-year yield climbed above 5.25% to its highest level since 2002. After 5% didn't stop the indexes in their tracks, as some thought it might, the focus has turned to the dangers of a possible 6% 10-year Treasury yield.

"I think the market can get there organically," said Dustin Reid, chief fixed-income strategist at Mackenzie Investments, although a 6% 10-year yield isn't his base case, given the buying this week and strong Treasury auctions.

Yields were fairly steady at roughly 5.25% on the 10-year and 5.6% on the 30-year BX:TMUBMUSD30Y on Friday. Those yields tend to attract sovereign-wealth funds, central banks, pension funds and other types of investors looking to match assets with their liabilities, Reid said.

Still, a 6% 10-year yield also sounds "reasonable" if the prices for oil and related fuels stay high, the strong artificial-intelligence spending cycle continues and U.S. economic growth remains constructive, Reid said.

Pimco's Dan Ivascyn this week told the Financial Times that the 10-year Treasury yield could hit 6% if highly leveraged investors have to suddenly unwind losing bets after weeks of heavy selling.

"I don't think you need to see disruption," said Reid at Mackenzie.

Harley Bassman, a bond-market veteran and creator of the closely watched MOVE Index, which tracks Treasury-market volatility, said in a call Friday that he isn't forecasting the 10-year yield. But he remains in the "higher for longer" rate camp, given a U.S. budget deficit at $2 trillion and the capital being spent by the "hyperscalers" to build data centers.

Furthermore, a good chunk of funds now mechanically end up allocated directly through target-dated funds that skew toward stocks. That "passive autopilot" function means investors tend to stick with those allocations, even when bonds start looking more attractive, Bassman said.

Focus on quarterly funding

Once investors get past the consumer inflation data due out Wednesday, Friday could produce swings in long-end yields, according to strategists at BofA Global.

That's because a highly anticipated Treasury "dealer survey" will go out at noon, and Wall Street will be looking for any hints of potential changes in long-dated Treasury supply when the quarterly refunding announcement emerges a few weeks later.

"Client feedback suggests 35%-40% odds of supply cuts" to 20-year to 30-year issuance at the November refunding, the BofA rates-strategy team wrote in an Oct. 9 client note.

Given expectations for some cutbacks in long-dated issuance, no changes could set the market up for disappointment in November, Reid at Mackenzie said.

"Doing nothing does not seem to be a good option here, for the market," he said.

-Joy Wiltermuth

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10-09-26 1603ET