The bond market remains under pressure as there’s still no progress in the Iran-US talks, with Tehran saying it won’t soften its demands after Trump rejected its proposal to reopen the Strait of Hormuz in exchange for lifting the US blockade and restrictions on Iranian ports.
Hence, oil prices jumped on Monday, with the US 10-year yield rising 7bps to 5.23%, its highest since 2007, while the 30-year yield hit a more than 22-year high.
Now, once the 10-year Treasury yield breaks above 5.25%, bonds could lose their defensive role as stocks and bonds move in tandem, forcing portfolios to recalibrate and adding to market volatility.
And a priori, there’s little chance of sentiment returning without a resolution on Iran.
With PMIs still pointing to solid growth, the Cleveland Fed forecasting 5.1% annualized growth this quarter, and the AI boom driving demand for both capital and labor, the Fed has little reason to turn dovish. No wonder rate swaps now price roughly 100bps of Fed hikes over the next year, taking rates from 3.75%–4.00% to 4.75%–5.00%.
The Treasury buyback program probably won’t help much either, as it mainly swaps older, less liquid bonds for newer ones without reducing overall debt, while new supply keeps coming, with the Treasury selling $70bn of five-year notes at a 5.03% yield after offering a premium to attract demand.
As for what happens if bond yields keep rising, the short answer is that risk appetite could weaken, putting further pressure on equities and crypto, including Bitcoin and Ethereum prices.
The good news is that the worse markets perform and the closer we get to the US midterms, the more incentive Trump may have to pull a mega TACO and sign a deal with Tehran, even if it’s far from ideal. If that doesn’t happen, it’s hard to see AI developments saving markets this time.
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