[Financial Planning for the 100-Year Life] U.S. 10-Year Treasury Yield at 5%: Where Risk and Opportunity Converge

Last week, the yield on the U.S. 10-year Treasury note rose to 5.2%, marking its highest level since June 2007. This is more than just a swing in the bond market—it is closer to a comprehensive report card reflecting the market’s assessment of growth, inflation, and fiscal health in the U.S. economy.

The first reason for the rise in market interest rates is excessive government debt. In the first quarter of this year, U.S. government debt reached 122.6% of gross domestic product (GDP), and the fiscal deficit stood at 6.0%. When deficits persist, the government must refinance maturing debt while also issuing new Treasury securities. The market requires a higher term premium to account for the increased supply and fiscal risk. The second factor is high nominal growth. In the first half of this year, the U.S. nominal GDP growth rate was 6.3% year-on-year. The average nominal GDP growth rate between 1971 and 2025 was 6.3%, while the average 10-year Treasury yield over the same period was 5.9%. Over the long term, long-term interest rates tend to move in line with the pace of nominal GDP growth. The current high rates thus signal that nominal growth, including inflation, remains elevated.

For interest rates to fall, either the fiscal deficit must decline or nominal growth must slow. The former is unlikely anytime soon. Ultimately, the most probable outcome is that high rates will, with a time lag, reduce consumption and investment, bringing about the latter scenario. In particular, investments in AI data centers and semiconductors, which rely heavily on large-scale capital expenditures and external financing, will face stricter profitability assessments. A risk-free Treasury yield of 5% per year is a powerful alternative. Investment projects with unclear expected returns are inevitably scaled back or postponed first.

The same logic applies in the stock market. As interest rates rise, the discount rate on future earnings increases. Both the Buffett Indicator and the price-to-earnings ratio (PER) for the U.S. stock market are at historical highs. Growth stocks with elevated valuations are especially vulnerable to rising rates. Stock price corrections reduce consumption via the reverse wealth effect, which in turn lowers the nominal GDP growth rate. In this way, rising long-term interest rates can themselves trigger an economic slowdown.

A noteworthy indicator is the Marshall K, which is the ratio of broad money supply (M2) to nominal GDP. From the first quarter of 1990 through the second quarter of 2026, the correlation coefficient between Marshall K and the U.S. 10-year Treasury yield was negative (-) 0.71. When nominal GDP grows more quickly than the money supply, lowering the Marshall K, demand for funds increases, making it easier for long-term rates to rise. Conversely, during recessions or monetary easing, M2 increases, pushing this ratio higher while interest rates are more likely to fall.

History has shown that rapid rises in interest rates can expose weak links. This was the case with the bank and savings & loan crisis in the 1980s, the Mexico and Asia currency crises in the mid-1990s, the collapse of the IT bubble in 2000, the global financial crisis in 2008, and the Eurozone debt crisis from 2010 to 2012. While rate hikes are not the sole cause of such crises, they amplify the loss and refinancing burdens associated with accumulated debt and liquidity risks.

This is not a distant issue for Korean investors. From January 2000 to August 2026, the correlation coefficient between the 10-year government bond yields of Korea and the U.S. was 0.78. A rise in U.S. rates will likely lead to a decline in the price of Korean government bonds.

However, for long-term investors, this situation provides an opportunity to purchase bonds with higher yields. Now is the time to gradually increase the allocation to government bonds rather than chasing overvalued growth stocks. Given the ongoing risks of fiscal deficits and inflation, maturities should be diversified, and for U.S. Treasury securities denominated in dollars, exchange rates should also be closely monitored. Yields of around 5% in U.S. Treasuries may mark the starting point of risk, but at the same time, this may also be the point where risk is finally offering investors ample compensation.

Kim Youngik, Adjunct Professor at the Hanyang University Future Talent Education Institute

This content was produced with the assistance of AI translation services.