The US interest rate market has once again sent a strong signal of tightening. According to market reports, the yield on 5-year US Treasury bonds briefly rose above 5%, reaching a level rarely seen over the past two decades. At the same time, preliminary September data for the US manufacturing and services Purchasing Managers' Index (PMI) came in above expectations, pointing to resilient business activity and demand. This prompted markets to reassess expectations for the Federal Reserve's (Fed's) future actions.

Traders are currently pricing in the probability of roughly four additional Fed rate hikes over the next 12 months. For financial markets, this is not simply a question of whether rates will continue to rise. It also concerns how long the high-rate environment may persist, as well as the repricing risks facing bonds, gold, the US dollar, and equity indexes.

What is the market pricing in as 5-year bond yields rise above 5%?
The yield on 5-year US Treasury bonds is generally viewed as an important indicator of the expected medium-term trajectory of interest rates. When 5-year yields rise rapidly, it indicates that investors not only expect short-term interest rates to remain high, but are also demanding higher returns for holding medium-term US government debt.

The report noted that the 5-year Treasury yield jumped approximately 20 basis points to 5.03%, breaking above its previous high. The yield at the auction of 5-year US Treasury notes also rose to a multi-year high. Overall, this indicates that the market is pricing in several factors at once: