As 5% Treasury yields lose shock value, investors start worrying about 6%

LONDON, Sept 24 (Reuters) - For years, 5% on the benchmark US 10-year Treasury yield was viewed as the point at which global financial markets would start hitting turbulence. That threshold is beginning to look less like a ceiling and more like a waypoint.

This month's breach of 5% - something that has happened ‌only briefly in recent decades - has forced investors to contemplate an unsettling question: What if 6% is the new number that should be keeping them awake at night?

The latest ‌move above 5% has not lasted long enough yet to properly test that theory. But it has always been a psychological marker rather than an automatic tripwire, according to BlueBay Asset Management's head of market strategy, Mike Bell.

"People think of it ​as if there's a magic number for Treasury yields at which it becomes a problem, (but) it's a relative number, not an absolute number," Bell explained.

What matters is how Treasury yields compare with other key investment metrics, particularly the earnings yield on stocks. Bell says that relationship is now approaching an inflection point, potentially setting the stage for an equity selloff.

History offers some guidance. MSCI's main world stocks index halved in value the last time the 10-year Treasury yield broke 5%, which was just before the global financial crash. It suffered a similar slump less than a decade earlier when a near 6.8% spike helped pop the dotcom ‌bubble.

JP Morgan's analysts say one of the reasons why the pain-point ⁠might now be above 5% again is a "key structural shift" in the global economy, with AI, healthcare and services playing a bigger role. Many of those firms are spending and expanding, regardless of the level of borrowing costs.

That means "the traditional interest-rate channel looks materially less binding" and the "breaking threshold" of stock markets ⁠may be "meaningfully higher, potentially in the 5.5%-6.0% range", JP Morgan said, referencing the views of some of the major investors at one of its most recent conferences.

In the $29-trillion Treasury market, which anchors pricing for virtually all financial assets, a shift from 5% to 6% would represent a profound adjustment in the global cost of capital.

A 6% Treasury yield would imply either significantly higher inflation expectations, growing concerns about US fiscal sustainability, a conviction that ​interest ​rates will remain elevated for years - or a mix of all three.

Federal Reserve policymaker Austan Goolsbee said this ​week that he didn't know whether markets would react differently to a lengthier ‌period of 5% yields than they had in the past.