A sharp selloff in global bond markets this week has begun to impact risk assets that had been on a sustained rally. On Friday, the three major U.S. stock indices retreated significantly, with technology stocks bearing the brunt of the selling pressure. The S&P 500 index fell over 1.2%, while the yield on the 10-year U.S. Treasury note broke above 4.5%, raising market concerns about the duration of the high-interest-rate environment. Concurrently, Japan's 30-year government bond yield surpassed 4% for the first time in history, and long-term U.K. gilt yields climbed to their highest level in 28 years. International oil prices also continued to rise, with Brent crude exceeding $105 per barrel.
For several months, markets had repeatedly ignored risks such as escalating Middle East conflicts, rebounding inflation, and supply chain disruptions. U.S. stocks continued to reach record highs, corporate bond credit spreads remained low, and high-risk trades like AI concept stocks and crypto assets remained popular among retail investors. However, the situation began to shift this week. As the U.S. released consecutive inflation reports exceeding expectations, long-term bond yields rose rapidly, prompting markets to reassess the risk that the Federal Reserve may not only be unable to cut rates but could potentially tighten policy further.
"Once the 10-year Treasury yield broke through the psychological barrier of 4.5%, the risk became dangerous, affecting not just the bond market but the entire risk asset complex," said Priya Misra, a portfolio manager at Morgan Asset Management. She noted that as financial conditions continue to tighten, the market's focus is gradually shifting from "pure inflation" to "stagflation risk."
Despite Friday's pullback, U.S. stocks had previously risen for seven consecutive weeks. However, underlying market structure has shown signs of weakness. Data shows that eight of the 11 sectors in the S&P 500 have declined this month, with most gains concentrated in the technology sector. Meanwhile, despite the surge in bond yields, investment-grade and high-yield corporate bond credit spreads have remained stable, primarily supported by strong corporate earnings and robust primary market demand.
Analysts point out that what truly unsettled markets this week was not just the rise in yields but their "global synchronized increase." The yield on the 30-year U.K. gilt briefly rose above 5.8%, hitting its highest level since 1998, amid market concerns that Prime Minister Keir Starmer could face challenges within his party. Simultaneously, government bond yields in Japan, Germany, Spain, and Australia also moved higher.
"Resurgent inflation is adding pressure to an already fragile bond market," said Emmanuel Cau, head of European equity strategy at Barclays. He believes U.K. political risks are pushing up the risk premium on U.K. gilts, and this pressure is beginning to spread to global developed market bonds.
Meanwhile, an increasing number of Wall Street institutions are growing concerned about the impact of high rates on stock valuations. Lori Calvasina, a strategist at RBC Capital Markets, warned that if the 10-year U.S. Treasury yield reaches 5%, the U.S. stock valuation system could face significant compression. Bank of America previously stated that a 5% yield on the 30-year Treasury is a key market threshold; if long-term rates continue to climb, they could exert greater pressure on stock market risk appetite.
Nevertheless, market bulls remain confident in the AI theme. Steve Chiavarone, deputy chief investment officer at Federated Hermes, believes that bond markets and AI stocks actually reflect logic based on different time horizons. He stated that rising oil prices and bond yields reflect supply constraints and sticky inflation over the next 3 to 6 months, while AI stocks are betting on productivity gains and falling inflation over the next 1 to 3 years. Chiavarone noted that the current strength of corporate earnings revisions is the strongest he has seen in the past 20 years and believes stocks remain a better inflation hedge than bonds, cash, or even precious metals.
However, bears worry that the current market narratives are difficult to sustain simultaneously over the long term. "All these asset classes are telling their own reasonable stories, but they are not telling the same story," said Gene Goldman, chief investment officer at Cetera Financial Group. He believes that ultimately, either stock valuations will be forced down, or the bond market must reassess how tight Federal Reserve policy truly needs to be.
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