Treasury yields hitting 5% may not break markets now — but the clock is ticking

Treasury yields hitting 5% may not break markets now — but the clock is ticking. With long-term Treasury yields surging, mortgage rates are approaching levels that could further erode affordability.

What happened

S. rates strategist at TD Securities, also pointed to housing as particularly sensitive because higher long-end Treasury yields feed directly into mortgage rates. The 10-year Treasury yield has hit its highest since 2007, pushing borrowing costs deeper into territory that could expose some of the financial system's weakest links. Skip NavigationMarketsBusinessInvestingTechPolitics & PolicyVideoWatchlistInvesting ClubPROLivestreamMenuKey PointsA sustained 5%-plus 10-year yield could expose vulnerabilities in housing, commercial real estate and heavily indebted companies. The question for investors is increasingly not whether a 5%-plus yield causes something to break immediately, but where the strain will emerge if rates stay there, industry veterans said.

"Note that 5% doesn't break anything on the day it arrives. It breaks things twelve to eighteen months out, when the refinancing must happen at the new rate," said Jack Ablin, chief investment officer at Cresset Capital. S. yields: Tikehau CapitalSquawk Box EuropeMolly Brooks, a U.

The wider picture

The refinancing clockSerious credit stress could emerge among companies and property owners as the debt raised when interest rates were far lower comes due. How long matters more than how highThe bigger question for markets, strategists say, isn't that the 10-year yield has breached 5%, but for how long it stays there. "Markets can typically absorb a temporary move above 5%, but a sustained period of six to twelve months or longer becomes much harder to ignore.

Brooks highlighted that the composition of the rise in yields also matters. Housing may feel the pressure first, as higher mortgage rates worsen affordability and freeze transaction activity. Duration matters more than 5% itself, with refinancing at sharply higher rates posing the bigger longer-term threat. Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U. Market experts echoed that a 5%-plus benchmark yield will expose vulnerabilities gradually, as higher borrowing costs work their way through housing, commercial real estate and heavily indebted companies.

What has been reported

The biggest danger comes if rates stay elevated long enough to force borrowers that loaded up on cheap debt during the zero-rate era to refinance at sharply higher costs. "The risk isn't the level we're looking at this morning, however, the longer we stay here, the more difficult things could get. "Housing feels it firstHousing will likely be among the most vulnerable. "It will likely show up in housing first," Ablin said. With 30-year mortgage rates potentially approaching 8%, he said, existing homeowners with mortgages around 3% are unlikely to sell.

That means the initial hit may be less a wave of defaults than a deepening freeze in transactions, hurting homebuilders, mortgage originators, title insurers, brokerages and home-improvement retailers. watch nowVIDEO6:1106:11'Pain point' for U. Banks, by comparison, may feel the pressure later, if prolonged high borrowing costs lead to deterioration among property or corporate borrowers, according to Leung. Over the short-term, a steeper yield curve can initially support lenders' margins as banks typically fund themselves at shorter-term rates and lend at higher rates further out the curve, Brooks said.

What happens next

"The key issue is not necessarily today's yield level, but the fact that debt raised at 2%-3% now needs to be refinanced closer to 6%-8% in many cases," said Billy Leung, investment strategist at Global X ETFs. "That creates pressure on cash flows, asset values and credit quality. "Many companies extended their debt maturities during 2020 and 2021 or subsequently pushed repayments further out, delaying the impact of higher rates. But "The critical point is that the maturity wall was moved, not removed," Ablin said.

Ablin said he is watching interest-coverage ratios in leveraged loans and signs of strain in private credit, including a greater share of borrowers paying interest with additional debt rather than cash. Leung highlighted leveraged loans, speculative-grade credit, private equity-backed companies and commercial real estate borrowers as especially sensitive to higher financing costs. Commercial real estate could face particularly acute pressure.