US 10-year Treasury yield hits 5%: Why bond market volatility remains low despite higher rates

US 10-year Treasury yields have climbed to 5%, but the bond market has not seen a similar jump in volatility. Options traders are expecting relatively limited movement in 10-year Treasury rates, even after the benchmark yield reached 5%. Three-month options on 10-year rates are currently pricing around 79.5 basis points of annualised volatility.US 10-year Treasury yield hits 5% as bond market volatility stays low (Photographer: Daniel Heuer/Bloomberg) (Bloomberg)That level of expected volatility is much lower than in October 2023, when 10-year Treasury yields last approached 5%. At that time, three-month options were pricing around 134 basis points of volatility, according to Reuters. The difference shows that investors are currently less nervous about the rise in Treasury yields than they were when yields approached the same level in 2023.The current rise in yields is being linked more closely to strong US economic growth than to sudden fears about the bond market or economy, according to analysts cited by Reuters. The 10-year Treasury yield crossed 5% last week for the first time in three years. The yield returned to the 5% level on Wednesday after the Federal Reserve's latest policy decision, Reuters reported.Treasury yield riseEven after the yield returned to 5%, rate volatility remained relatively low, showing that investors have not reacted with the same level of uncertainty seen during previous moves toward 5%. Analysts and portfolio managers said the move in Treasury yields has been orderly rather than sudden. The selloff in Treasuries began around the Fed's July policy meeting and, so far, has not shown signs of turning into a disorderly market move, according to analysts cited by Reuters.Chip Hughey, managing director of fixed income at Truist Wealth, said the rise in yields has happened gradually over about seven months. Hughey said the speed of the move matters. A slow and steady rise in yields can be easier for markets to absorb than a sharp jump over a short period, according to his comments to Reuters.Also read: Mortgage rates today after Fed hike: Why US home loan rates may stay above 7%The 10-year Treasury yield has not sustainably remained above 5% for about 25 years, apart from brief periods in 2006 and 2007. The last major approach to 5% before the current move happened in late 2023, when the US Treasury was increasing the size of its longer-term bond auctions.Why stronger US growth is keeping volatility lowOne reason for the lower volatility is that investors are increasingly focused on a stronger US economy rather than only on concerns about government debt and the budget deficit. Amrut Nashikkar, head of derivatives strategy at Barclays, said the Treasury selloff is being driven less by worries about demand for US government bonds and more by the stronger economic outlook, according to Reuters.Markets had started 2026 expecting the Federal Reserve to cut interest rates, but expectations have now shifted toward several rate increases and a higher long-term policy rate, Nashikkar said. This change in expectations is important because investors are becoming more comfortable with the idea that US interest rates could stay high for longer.If investors become more certain that the Fed will keep rates higher for a longer period, there may be less uncertainty about the overall direction of monetary policy, analysts said. That could allow Treasury yields to remain at a higher level without moving sharply up or down, which would keep volatility relatively low. In simple terms, investors may be adjusting to higher interest rates instead of reacting to them with panic. However, there is still uncertainty about what the Federal Reserve will do at its next few meetings.Also read: US stock futures today: Why Dow, S&P 500 and Nasdaq futures are rising after Fed hikeNashikkar said investors have been buying options linked to short-term interest rates, where traders are more focused on how the Fed may react over the next few months. Nashikkar said the market is uncertain about the Fed's next few decisions, but it is not pricing in a much wider or more disruptive change in the interest-rate outlook, according to Retuers. He also pointed out that the Fed does not provide forward guidance in the way investors might prefer, meaning higher volatility around individual Fed meetings is a normal feature of the market, according to his comments cited by Reuters.What is happening to long-term ratesMuch of the increase in Treasury yields is coming from expectations that short-term interest rates will stay higher for longer, Nashikkar said. Another part of long-term bond yields is the term premium. This is the extra return investors want for holding long-term bonds while facing uncertainty.The term premium has increased, but not nearly as much as expectations for short-term rates, Nashikkar said. This suggests that investors are becoming more confident that the US economy can handle higher interest rates without causing a major economic shock. So, the rise in the 10-year yield is not being treated entirely as a warning about economic problems. Instead, it is also reflecting expectations of stronger growth and higher interest rates.Strong corporate earnings are another reasonStrong US corporate earnings are also helping keep bond-market volatility under control, according to Victoria Fernandez, chief market strategist and fixed-income portfolio manager at Crossmark Global Investments. Fernandez said strong company earnings have helped investors feel more comfortable with higher Treasury yields.This strength is also visible in the credit market, where credit spreads have remained mostly narrow. Credit spreads even tightened last week among investment-grade technology companies, Fernandez said. Strong corporate profits can make higher borrowing costs easier for companies and investors to absorb because businesses are still generating solid earnings.Fernandez expects earnings growth of around 25% to 26% over the next two quarters, she said. She also said corporate profit margins are around 17%, which she described as the highest level in roughly 30 years.The US labour market is another factor supporting investor confidence. Fernandez said the economy has avoided broad-based layoffs. Because companies are still reporting strong profits and the labour market has avoided widespread job cuts, investors appear willing to accept higher Treasury yields for now, Fernandez said, according to Reuters.Fernandez summed up the mood by saying investors appear to believe that the economy can handle higher rates for now, although they may become less comfortable if high rates continue for years.The key difference from previous moves toward 5% is therefore not simply the level of the 10-year yield, but the reason behind the move. Earlier episodes saw yields fall quickly as economic and market uncertainty increased, while the current rise has been more gradual and is being linked to stronger growth and expectations of higher rates.For now, the bond market is showing a relatively unusual combination: 10-year Treasury yields around 5%, but much lower expected volatility than when yields were near the same level in 2023. The main risk for volatility going forward is likely to come from changes in Fed expectations, economic data and the sustainability of strong corporate earnings, rather than simply the fact that the 10-year yield has reached 5%.