Yields for 10-year Treasury bonds have cleared 5%, a psychological, historic and financially biting milestone for investors that complicates underwriting for all sorts of debt. 

The 10-year yield sat at 5.04% Tuesday morning after clearing 5% on Monday for the first time since 2007, with the exception of a few hours in 2023. If sustained, an elevated yield will drive up borrowing costs and threaten momentum in commercial real estate capital markets. 

“What we’re watching right now goes well beyond a routine wobble in bond markets,” Nigel Green, the CEO of advisory and asset management firm deVere Group, said in an email Tuesday morning. “It’s a major repricing of risk, and it’s happening at a speed that should worry anyone with exposure to stocks, property, or long-duration debt.”

Green said oil prices were moving in lockstep with yields as growing uncertainty over a resolution to the U.S. war with Iran and the closure of major oil pipelines along with the Strait of Hormuz spiked prices. 

Bond yields don’t typically swing radically, and the more than 20-basis-point rise over the last five days is an unusually fast pace that indicates that there is likely some risk in the broader marketplace. 

“A jump like that tends to break something, whether it’s a leveraged trade, a stretched valuation, or a borrower who assumed cheap financing was permanent,” Green said. 

Higher rates mean higher borrowing costs, which threaten even more properties facing a refinancing on debt underwritten before or even during the pandemic-era run-up in rates. 

“There's no way around the fact that higher long-term yields will have a dampening effect on transaction volume,” Xander Snyder, an economist at First American Financial Corp., said in an email. “That's the nearest term impact — debt is more expensive than it was a month ago, and that makes fewer deals pencil and refinance proceeds shrink.”

The level of distress in commercial real estate loan markets has been rising and reached 10.8% in July after three consecutive months of increases, according to Cred iQ. Special servicing rates are rising similarly, even as transaction volume accelerates. 

Investors spent $74.4B on U.S. commercial real estate in July, the highest volume for the month since 2005 and up 78% from the prior year, according to MSCI.

The 5% threshold is less of a crossing point and more of a signal of a shift in how capital markets are behaving in light of the macroeconomic backdrop, BGO Chief Economist Ryan Severino said in an email.

“It forces a reckoning with what is driving the CRE market and CRE returns today versus the last 25 years,” he said. “That regime of structurally declining interest rates and cap rates is over, replaced by one where we will be rangebound for both interest rates and cap rates. In such a range we cannot bank on structural declines and must reckon with the fact that volatility can have a greater impact than in the past.”

The rise in bond yields is coming despite Treasury Secretary Scott Bessent’s attempts to tamp down momentum with up to $6B in bond buyback commitments, but traders have been unmoved and continued to push rates higher. 

Bond yields have been rising as inflation remains well above the Federal Reserve’s target of 2%, adding pressure on the central bank to raise rates Wednesday to rein in price hikes and reassert itself as committed to fighting inflation. 

The August consumer price index came in at 3.4% on an annualized basis and up 0.4% from the prior month, in line with analysts' expectations. Core CPI, which strips out energy and food costs, came in at 0.3% month-over-month, slightly above expectations. 

Stubbornly elevated inflation has been coupled with relative strength in the job market, which across the year has shifted expectations on the Fed’s direction from rate cuts to at least one likely hike. 

As of Tuesday morning, futures traders had priced in a 92.7% chance that the Fed will raise its benchmark rate by 25 basis points Wednesday, CME Group’s FedWatch tool shows.