The world's most important bond market is under pressure from elevated oil prices, inflation concerns and America's enormous public debt, and the US benchmark borrowing cost could climb to 6%, a 26-year high, PIMCO has warned.

Dan Ivascyn, chief investment officer of bond giant PIMCO, said the current 10-year Treasury yield of 5.29% could feasibly rise substantially further.

The $32 trillion Treasury market has been hit by weeks of selling, forcing hedge funds and other investors to unwind losing bond positions. "Even from a short-term trading perspective, this is entirely possible," Ivascyn said in an interview. "Part of the market turbulence of the past few weeks stems from negative technical factors, with platform-based hedge funds and other leveraged investors triggered into stop-loss exits. Yields could absolutely touch 6%."

Ivascyn's view echoes what many investors have concluded in recent weeks: a vicious cycle is forming in the Treasury market. Wave after wave of selling drives yields higher, which in turn pushes other market participants such as real estate investment trusts to keep selling bonds.

With only weeks to go before midterm elections that will decide control of Congress, rising yields are already weighing on American households. Data released Thursday showed US mortgage rates at their highest since 2023; as of October 8, the average 30-year fixed mortgage rate reached 7.4%, up 0.12 percentage points from the previous week.

Ivascyn believes further rises in Treasury yields would also hit riskier assets such as equities and corporate bonds. He said that if the 10-year Treasury yield climbs to 5.5% or above, "risk markets like credit and equities would show clear weakness."

Although US stock indexes remain near record highs, there are already signs that high yields are squeezing some American companies. Hit by both rising Treasury yields and investor demands for higher risk compensation on loans to lower-quality firms, funding costs for the lowest-rated tier of corporate debt reached 17% this month, the highest level since May 2020.

Ivascyn predicts that beyond pressure on the risk segments of public markets, higher Treasury yields will also bring "slow-burning" risks to private market areas such as commercial real estate. Such assets "still have fragile capital structures and weak fundamentals."

Ivascyn also noted that persistently higher yields will eventually attract investors to increase allocations to Treasuries to lock in attractive returns, which will become a constraint on further yield increases. This week's Treasury auctions already showed this trend: both the 10-year and 30-year note sales drew strong investor demand.

Beyond the US market, Ivascyn sees appeal in overseas bond markets. He said PIMCO "is not as worried as some market participants about America's ability to sustain high deficits for a period," but "investors need not hold only US bonds." He cited Australia, which has extremely high-quality credit bonds, and the UK, which despite its own various challenges still offers a premium in gilt yields relative to the US. He added that other markets such as Canada and Germany, especially dollar-denominated instruments, "offer highly attractive yields and a better starting point on fiscal fundamentals."

The 10-year Treasury yield is the pricing benchmark for trillions of dollars in global assets. The yield has now returned to levels last seen at the start of the century. Investors worry that inflation driven by the situation in Iran, heavy borrowing by AI companies and strong economic growth expectations are together pushing US interest rates higher. Bonds provide fixed cash flows, and inflation is a negative factor for bond assets.