U.S. Treasurys are now firmly in the 'danger zone,' strategists say

U.S. Treasurys have entered a "danger zone" as surging long-term yields raise fears that sticky inflation and hawkish rate expectations could begin spilling over into equities and broader risk assets, said HSBC.

The selloff in government bonds intensified Tuesday, pushing the 30-year Treasury yield above 5.19% to its highest level since 2007. Meanwhile, the benchmark 10-year yield climbed toward 4.69%.

Yields on the 30-year are up slightly less than 1 basis point at 5.184% as of 9:10p.m. ET, while yields on the 10 year are at 4.667%.

"U.S. Treasuries are now firmly in the Danger Zone – the level of 10Y UST that tends to put pressure on virtually all asset classes," HSBC strategists wrote in a note late Tuesday, warning that further repricing in terminal rate expectations could drive yields "even further into the Danger Zone, likely leading risk assets temporarily lower."

The bank said markets have so far remained relatively resilient because corporate earnings growth has stayed robust, valuations had already partly adjusted before the recent Iran tensions, and investors still broadly believe the Middle East conflict will mostly just affect oil.

The moves in yields are psychologically significant, particularly after the 30-year Treasury auction cleared above 5% for the first time since 2007, according to Interactive Brokers' chief strategist Steve Sosnick.

Current market conditions are a "yellow alert" rather than a "red alert," Sosnick said, adding that a move toward 4.65% on the 10-year yield or 5.5% on the 30-year bond could trigger more acute market stress.

Further moves may also start to affect stocks, according to BMO Capital Markets strategist Ian Lyngen.

If 30-year yields climb toward 5.25% in coming weeks, there will be a more durable pullback in equity valuations, he said.