The next week could determine whether pressure from the U.S. Treasury market spreads more forcefully into stocks.
Treasuries are sending increasingly strong stress signals across asset classes, and equities are at the front of that line. Long-dated U.S. yields jumped sharply last week, with the 30-year Treasury yield reaching its highest level since 2007. The 10-year yield also broke out of the trading range it had held since late 2023.
At the same time, the ICE BofA MOVE Index, a gauge of expected volatility in the Treasury market, climbed to its highest level since May. Demand for downside protection in bonds also surged. Data from the Chicago Board Options Exchange showed that one-month put skew tied to the iShares 20+ Year Treasury Bond ETF (TLT) rose to its highest level since the 2008 financial crisis.
The next several days bring two major events: the release of details on the U.S. Treasury’s financing plan and the July nonfarm payrolls report. Both could add to turbulence in the bond market.
Questions over Fed credibility drive the move in long-end yields
The report says the latest rise in Treasury yields is being driven chiefly by doubts over the Federal Reserve’s policy credibility.
Since Kevin Warsh took over as Federal Reserve chair, he has maintained a hawkish stance on inflation. But inflation has remained above the Fed’s 2% target for five straight years, leading investors to question whether the central bank is truly willing to raise rates again.
Last Wednesday’s rate-setting meeting exposed an unusual split inside the Fed. Three regional Fed presidents voted in favor of a rate hike, diverging from the committee majority. After Warsh ended his press conference, long-dated yields jumped while short-dated yields fell, sharply narrowing the spread between the two. Dow Jones market data analysis described it as the biggest compression in the yield curve on a Fed decision day since 2023.
Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, said, “The market is questioning how committed the Fed really is to controlling inflation.” He also said his base case still calls for no rate hikes this year or next, though the probability of a hike has risen “significantly.”
Volatility climbs as hedging demand expands
The move in yields quickly fed into derivatives markets, where hedging demand accelerated.
The MOVE Index reached a high not seen since May, showing traders are actively protecting against the risk of further increases in rates. At the same time, the ratio of put trading to call trading tied to TLT moved higher. CBOE analysts said one-month put skew on TLT had climbed to its highest level since the 2008 financial crisis.
One notable feature of the latest sell-off is the divergence between long-end yields and oil prices. Crude fell rather than rising alongside yields, weakening the relationship between the two and adding another layer of uncertainty to the market.
Spillover concerns grow as equities face more pressure
Instability in the Treasury market has often acted as an early warning sign for stocks, and the current backdrop is keeping equity investors on edge.
Bob Elliott of Unlimited Funds wrote in a recent comment, “It’s hard to tell how long stocks and other asset markets can hold up at current rate levels without being pulled lower.” He also said that when Treasury yields reach or approach these levels, stress often begins to spread into other markets, with equities usually taking the first hit.
The report put the 30-year Treasury yield at 5.239% and the 10-year yield at 4.693%, both in historically elevated territory. Goldberg also pointed to geopolitical uncertainty tied to Iran, unclear Fed guidance, and a range of other market noise as factors behind the fragile backdrop. “All kinds of uncertainty are intertwined,” he said.
Treasury funding plans and payroll data now take center stage
The next week is seen as the key test for whether this Treasury pressure broadens.
Later this week, the U.S. Treasury is due to release details of its latest government financing plan. Any surprise in that announcement could trigger another round of bond-market volatility. A series of major economic data releases is also scheduled, ending with Friday’s July nonfarm payrolls report. That jobs data is expected to carry major weight for market expectations around the Fed’s policy path.
The report also noted that last week the U.S. Treasury and the Federal Reserve joined Japanese authorities in what it described as a historic coordinated intervention to stabilize the falling yen. Analysts said part of Washington’s motivation in joining the action was to prevent another bout of instability in the Treasury market.
The $30 trillion U.S. Treasury market sits at the core of the global financial system. It serves as the main collateral base for short-term institutional liquidity and as the benchmark pricing anchor for trillions of dollars in debt worldwide. If that market keeps shaking, the effects are unlikely to stay confined to bonds.