10-Year Treasury Yield Tops 5% as Fed Hikes, But Deeper Risks Remain, Zheshang Securities Warns

The benchmark 10-year U.S. Treasury yield briefly surpassed the key 5.00% threshold before retreating after the Federal Reserve's latest interest rate decision. While the Fed's move stabilized the bond market in the short term, the fundamental issues driving yields higher have not been resolved, according to a research report from Zheshang Securities.

Fed's Hawkish Hike

The Federal Open Market Committee (FOMC) raised the federal funds rate target range by 25 basis points to 3.75%-4.00%, a move that was widely expected. The decision was unanimous, which Zheshang Securities interpreted as a sign of strengthening hawkish sentiment within the central bank.

Fed projections also pointed to a more aggressive stance, with the median forecast for the policy rate at the end of 2026 rising to 4.1%. The committee's dot plot showed that 12 of 18 officials anticipate at least one more 25-basis-point hike this year. The brokerage noted that the Fed's decisive action helped reassure investors of its independence and commitment to fighting inflation, providing temporary relief to a market concerned about a lack of monetary discipline.

Root Causes of High Yields Persist

Despite the market's initial positive reaction, Zheshang Securities warns that the upward trend in Treasury yields is likely to continue. The report suggests the 10-year yield could still have 50 to 100 basis points of potential upside, citing unresolved structural problems.

Ad

Key underlying drivers include:

• U.S. Fiscal Imbalance: The report highlights that total U.S. national debt has exceeded $40 trillion. In the first 11 months of fiscal year 2026, the budget deficit reached $1.97 trillion, with net interest payments alone totaling $1.02 trillion, the second-largest government expenditure after Social Security.
• Persistent Inflation Risks: Geopolitical tensions, such as the U.S.-Iran conflict mentioned in the report, could create sustained mismatches in global oil supply and demand, posing a long-term risk of resurgent inflation.

Contagion Risk for Equities

Analysts at the firm believe the Fed is caught in a difficult position where any policy choice could lead to higher bond yields. If the Fed's tightening is insufficient, inflation could become entrenched; if it hikes too aggressively, the policy rate itself will push yields higher.

This environment poses a significant threat to U.S. stocks, particularly the technology sector. Zheshang Securities warns of a potential negative "Davis double-whammy," where rising risk-free rates compress stock valuations while higher borrowing costs simultaneously erode corporate earnings. This dynamic could increase the risk of a sharp correction in equities, potentially leading to a simultaneous sell-off in both the stock and bond markets.