By Joseph Adinolfi and Joy Wiltermuth
'There is not a &#34;break-the-glass&#34; solution,' says former Treasury Secretary Steven Mnuchin of backup plans if the U.S. can't finance its debt
Is this a setup for another slam-dunk bond-market trade?
It's about that time again.
The yield on the 30-year Treasury bond has been brushing up against the 5% threshold over the past week, as rising inflation expectations and real interest rates have been a one-two punch for the global bond market.
Indeed, many international bond markets have been hit even harder than the U.S. Since the start of the Iran conflict, the yield on the 30-year Treasury bond BX:TMUBMUSD30Y had risen by 35 basis points through Monday. By comparison, the yield on the Japanese 30-year bond BX:TMBMKJP-30Y had gained approximately 39 points, Dow Jones Market Data showed.
Since late 2022, buying the &#34;long bond&#34; when yields were at 5% - or slightly above that psychologically important level - has been a reliable moneymaker for traders. In almost every instance, a reaching or breaching of the 5% level was followed by a swift decline in yields. Anybody who felt bonds were cheap and decided to go long could have booked a tidy profit - either using an ETF like the iShares 20+ Year Treasury Bond ETF TLT or the Direxion Daily 20+ Year Treasury Bull 3X ETF TMF, or simply by trading in the futures market, where investors can access even greater leverage.
The more times a level gets tested...
But investors are already debating whether such a trade would pay off as readily this time around.
In a recent post on his Substack, Jason Perz of Against All Odds Research said that everybody is watching the 5% level on the 30-year bond, as traders come around to the view that a Federal Reserve interest-rate hike is more likely than a rate cut this year. The Fed hasn't raised interest rates since the summer of 2023. Its most recent rate cut came in December.
The idea that 5% represents some kind of impenetrable ceiling for yields is misguided, Perz said.
&#34;They see the repeated tests, and the conclusion most people are drawing is that bonds simply can't break lower from here. That's exactly where the mistake is,&#34; Perz said. Bond prices move inversely with yields, so rising yields mean lower prices, and vice versa.
&#34;One of the simplest truths in technical analysis is that the more times a level gets tested, the more likely it is to break,&#34; he added.
Others are more sanguine. Even though the latest data showed that inflationary pressures crept higher in March - with the year-over-year headline rate on the consumer-price index hitting 3.3%, the highest in two years - the instinct to buy the dip in bonds remains strong, said Will Compernolle, a macro strategist at FHN Financial, during an interview with MarketWatch.
Plus, Compernolle thinks that if the conflict in Iran drags on, higher energy (CL00) (BRN00) prices will eventually dent the U.S. economy. Investors have gotten complacent because energy prices in the futures market have retreated from their peak levels, but Compernolle worries more economic pain likely lies ahead.
&#34;I don't see the 10-year [Treasury note] or the 30-year [Treasury bond] getting cheaper from here,&#34; he said.
Others said the trade was starting to look interesting now. Asked by MarketWatch, Matt Tuttle, an ETF-industry veteran who shares some of his trades on X, said he &#34;wouldn't argue&#34; against taking a long position in PMF, the levered Treasury ETF from Direxion.
No easy solution
To be sure, worries about the sustainability of the U.S. fiscal situation have been percolating for years. There is no easy solution, and many are worried that U.S. borrowing costs could continue to climb in the years ahead if nothing is done to reduce the U.S.'s perennial budget deficits.
Former Treasury Secretary Henry Paulson warned in April that the U.S. needs an emergency &#34;break-the-glass&#34; plan if demand were to collapse in the Treasury market. Paulson was at the helm of the Treasury during the 2008 global financial crisis.
&#34;I, unfortunately, think there is not a 'break-the-glass' solution,&#34; said Steven Mnuchin, founder of private-equity firm Liberty Strategic Capital and former Treasury Secretary during President Trump's first term in office.
Yet Mnuchin also isn't anticipating &#34;a make-or-break moment where one day we wake up and we can't finance the debt,&#34; he said Tuesday during a Bloomberg TV interview.
Mnuchin said a 30-year bond yield near 5% reflects inflation uncertainty from the Iran war, but also the higher costs required to finance the U.S. on a longer-term basis.
The pandemic era &#34;kind of normalized trillion-dollar spending,&#34; he noted, adding that it will take bipartisan support to cut mandatory spending down the road.
Treasury yields retreated on Tuesday, with the 30-year rate falling 4.3 basis points to 4.982% as of 3 p.m. Eastern time, according to Dow Jones Market Data. Yields on the 2-year BX:TMUBMUSD02Y and 10-year Treasury notes also declined.
Chelsea Ng contributed.
-Joseph Adinolfi -Joy Wiltermuth
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(END) Dow Jones Newswires
05-05-26 1848ET

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The yield on the 30-year Treasury bond has approached 5%, raising questions about the reliability of this trade strategy. While past trends suggest that yields decline after breaching this level, current inflation expectations and potential Federal Reserve interest rate hikes create uncertainty. Analysts are divided; some believe the 5% level may not hold, while others see value in long positions. Concerns about U.S. fiscal sustainability persist, with former Treasury officials warning of potential borrowing cost increases. Treasury yields have recently retreated, reflecting ongoing market volatility.

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FIRST HORIZON CORPORATION 6.50% DEP SHS REP 1/4000 PER PFD SER E

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FIRST HORIZON CORPORATION DEP SHS REP 1/400 NON CUM PER PFD SER B

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Betting on long Treasury bonds when yields near 5% has been a slam-dunk trade over the past few years. Is this time different?