The ongoing selloff in U.S. Treasuries continues to spread, with long-end yields repeatedly hitting new highs, making the market's assessment of the interest rate outlook increasingly complicated.
On Tuesday, the 30-year Treasury yield touched a 24-year high, while the 10-year yield also rose to its highest level since 2002. This move was notable—oil prices fell significantly that day, and New York Fed President John Williams also sent a dovish signal, suggesting there was no rush to raise rates, yet neither bearish factor could stop the upward march of yields. The stubborn trend in the Treasury market is now transmitting to stocks, with the three major indices closing slightly lower.
Behind the relentless rise in yields is the market's repricing of the Fed's rate hike path, as well as inflation concerns stemming from energy price disruptions caused by the Iran conflict. Even as oil prices pull back temporarily, investor confidence in the geopolitical situation remains fragile, making it difficult to turn optimistic.
30-Year Yield Breaks Through, Hitting 24-Year High
The 30-year Treasury yield currently stands at 5.564%, having touched 5.621% intraday on Tuesday, surpassing the intraday high from 2004 and marking the highest level since June 2002.
The 10-year Treasury yield closed at 5.256%, also the highest closing level since 2002. However, this yield has not yet broken above the 2007 intraday high of 5.303%—a threshold Wall Street views as a more symbolic technical resistance level that the market is watching closely.
Rebecca Venter, a senior manager for fixed income client portfolios at Vanguard, said, "The market is really starting to try to figure out how much more the Fed needs to raise rates to achieve its goals."
Mixed Forces at Play, Divergence Between Long and Short Ends
Tuesday's bond market did not move in a single direction, with both bullish and bearish forces applying pressure simultaneously, leading to divergence between long-end and short-end yields.
Long-end yields were under upward pressure, partly due to a supply-side shock. Paramount Skydance is expected to issue approximately $32 billion in bonds to fund its acquisition of Warner Bros. Discovery. As investors make room in their portfolios to absorb the new debt, they are selling long-dated Treasuries.
Short-end yields, meanwhile, were suppressed by John Williams' remarks. The influential Fed official said in a speech that another rate hike "later this year" might be appropriate, but emphasized there is "no need to rush." Earlier this month, the Fed voted for its first rate hike in three years.
Oil Prices Retreat, but Market Confidence Is Hard to Restore
Since the outbreak of the Iran conflict, oil prices have been one of the key variables driving Treasury yields higher. Rising energy costs have intensified inflation pressures, fueling concerns that the Fed may need to extend its rate hike cycle into next year.
On Tuesday, Middle East crude oil exports rebounded to their highest level since the conflict began, and Brent crude futures fell 2.6% to $102.59 per barrel.
However, the pullback in oil prices did not effectively lift market sentiment. Ross Mayfield, an investment strategist at Baird, noted that after so many "false dawns" and constantly shifting headlines, it is difficult for investors to truly build confidence in optimistic developments regarding the Iran situation.
Cboe Global Markets noted in a research report last week that the correlation between U.S. benchmark oil prices and 10-year Treasury yields has surged to a 35-year high, only slightly below the historical record set at the outset of the first Gulf War in 1990.
High Yields Reshape Stock Market Structure, AI Becomes the Last Support
Persistently rising interest rates are profoundly changing the internal structure of the stock market. Mayfield said high rates have hit sectors such as housing and consumer goods most significantly. At the same time, when short-term Treasuries can already offer generous returns, investors tend to retreat from high-dividend sectors like utilities.
"What's left is a stock market that relies more heavily on artificial intelligence to drive growth," Mayfield said. "This makes the market more fragile and more sensitive to any cracks in the AI narrative."
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