The international government bond market has come under pressure in recent months. This can be seen in the increase in bond yields in practically all advanced economies. What is particularly frightening, however, are the US Treasury Bonds. Those with a 10-year maturity have exceeded, albeit for a short time, an important psychological yield threshold, 5.25%.
Beyond this threshold, historically, a particular correlation with the stock market is reversed, which begins to follow the Bonds instead of behaving the opposite. The value of stocks begins to decline and, at this time, a phenomenon like this could be a big problem for the US and global economy.
The 5.25% Treasury Bond threshold, explained
To understand why US Treasury bond yields have started to spook the markets, you need to understand the correlation between the government bond market and the stock market.
Normally, the two markets have an inverse correlation: the worse T-Bonds do, the better Wall Street does. This happens because investors prefer to buy stocks, which have higher yields, over T-Bonds when the economy is healthy.
Historically, this correlation holds true until T-Bonds yield above 5.25% for an extended period of time. At that moment the correlation reverses. Fear begins to prevail among investors and sales of shares begin, with capital moving towards safe haven assets.
Why precisely 5.25%
The key word in this reasoning is historically. There is no mathematical reason why, when T-Bonds reach a 5.25% yield, the correlation with the stock market trend is reversed. It’s just always been that way. The most illustrative recent case of this mechanism was in 1999, when the Dot-Com bubble burst.
However, there are some theories as to why this threshold is so feared:
- The 10-year T-Bond is considered the global benchmark for “risk free” investment. Above 5.25% becomes competitive with stocks, and therefore investors tend to exit the stock market;
- A 5.25% T-Bond means very high real interest rates. Companies have to repay increasingly expensive debts and this uses capital that exits the market, slowing it down;
- The theoretical value of the shares is calculated with a formula that uses the yield of government bonds as the denominator. If this rises too much, at the same time the expected value of the shares falls and this can cause a flight of capital from the financial markets.
Why government bonds have such high yields
The reasons why the government bond market is under pressure in recent months are many and complex. To explain it, it is good to analyze the phenomena that have influenced the performance of securities from the longer term to the more contingent.
The origins of the government bond market crisis
The premise for this crisis is that the structure of public debt has been changing for years. There is less and less interest in long-term bonds, such as 30-year bonds. This has led states to sell more and more short-term bonds, 5 or 10 years in duration.
This increased the so-called refinancing risk. States do not pay the public debt with revenue, but with other debt. If debt is incurred with short-dated securities, it becomes more likely that we will end up replacing low-cost debt with high-cost debt.
This is what could happen to Italy in 2027 if BTP yields remain at current levels. Many bonds issued before 2021, when the cost of money was zero, will expire next year. They will have to be refinanced with new BTPs which risk having coupons close to 5%, compared to those of less than 1% for maturing securities.
The contingent factors that are worsening the crisis
There are therefore more and more government bonds on the market. Their value therefore falls and returns rise. This in itself is a risky situation, but one that is slowly developing. A series of contingent factors have accelerated it in recent months:
- the US debt which has exceeded 40 trillion dollars;
- inflation caused by war in the Middle East is rising and the Trump administration is not addressing it;
- the Fed is very slow to raise interest rates to combat inflation;
- T-Bonds above 5% compete with European securities, which therefore suffer from an increase in yields.
The risks of a financial crisis today
If the US stock market were to start to go badly, the consequences could be particularly serious for some risk situations that have arisen in recent years.
US families and stocks
The Fed found that in 2025, 33% of U.S. household wealth was held in stocks. A much higher percentage than in the past. According to several observers, this is one of the reasons why US consumers are holding up well to recent spikes in inflation.
As long as shares increase in value, in the event of a growth in expenses caused by inflation, families can always sell their shares and cover their expenses. If the stock market were to go into crisis this mechanism would stop working. The risk is that domestic consumption, on which the US economy has always been based, will collapse.
The debt for data centers and the rush to capital
On the bond market, however, there are not only states. In recent months, large technology companies have issued many bonds to finance the expense of building data centers used to train artificial intelligence.
JP Morgan estimated that, in total, this would be around $4.1 trillion in debt issued to pay for AI development, which is more than all of Italy’s public debt. Risky debt, the cost of which increases as T-Bond yields increase.
These companies will end up competing for the same capital as states, forcing governments to further raise bond coupons. This would risk starting a vicious circle:
- government bond yields would rise due to competition from corporate bonds;
- the increase in government bond yields would cause the value of shares to fall if it remained above 5.25% for a long time;
- the collapse in the value of shares would erode household savings, slowing down the economy;
- a slower economy would decrease tax revenues for states;
- States would be forced to borrow more money, issuing more bonds which would increase yields.
