Global financial markets experienced a rare simultaneous sell-off in stocks and bonds on Friday, with panic quickly spreading from bond markets to equities. Long-term government bond yields in the United States, Japan, Germany, and the UK surged significantly, reaching multi-year or even record highs. At the same time, U.S. stock index futures declined across the board, with the Nasdaq 100 Index dropping 1.5%. Asia-Pacific and European stock markets also faced widespread pressure, with South Korea's benchmark stock index plunging 6%. The core logic behind this sell-off is clear and severe: escalating conflicts in the Middle East are driving up energy prices, reigniting inflationary pressures, and systematically eroding market expectations for central bank interest rate cuts. On the 15th, it was reported that the United States had rejected Iran's written "14-point" proposal to end the war. Simultaneously, signals from both stock and bond markets are converging: while stock indices remain at elevated levels, gains are heavily concentrated in a few leading AI companies; meanwhile, bond markets have already begun pricing in higher interest rates and inflation. As oil prices surpass $100 per barrel and long-term interest rates continue to rise, concerns are growing that the current market rally, supported by liquidity and leverage, is far more fragile than it appears on the surface. From a market perspective, the yield on the U.S. 30-year Treasury bond firmly exceeded 5% on Friday, while the 10-year Treasury yield rose to 4.53%, hitting its highest level since May 2025. Japan's 30-year government bond yield broke above 4% for the first time since its issuance in 1999. South Korea's KOSPI index briefly surpassed the 8,000-point mark to reach a new all-time high during the session before sharply reversing and closing with a 6% plunge. This indicates that in an environment of crowded trades and high leverage, market sentiment can reverse far more quickly than anticipated. After hitting a record high, South Korean stocks sharply reversed, revealing the fragility of the AI-driven bull market. The world's best-performing stock market slammed on the brakes on Friday. South Korea's KOSPI index briefly touched 8,000 points in early trading before rapidly plunging, closing with a 6% loss. Samsung Electronics plummeted 8.6%, and SK Hynix fell 7.7%. These two chip giants alone contributed approximately two-thirds of the KOSPI's nearly 90% gains this year. An analyst at Samsung Securities noted, "The market is showing signs of fatigue, and caution is spreading. This pullback appears to be a case of exhaustion following an overly rapid and steep rally, rather than a sign of deteriorating earnings or a bursting bubble. It is still too early to draw conclusions." The extreme volatility in South Korean stocks mirrors the current state of global markets: when gains are excessively concentrated in a handful of AI beneficiaries, the initiation of profit-taking can lead to sharp index adjustments within a very short timeframe. Surging U.S. Treasury Yields: Inflation Takes Over Pricing, Rate Cut Window "Effectively Closes" The pricing logic in the U.S. Treasury market is undergoing a fundamental shift. The 2-year Treasury yield has climbed to 4.075%, significantly above the Federal Reserve's upper policy rate limit of 3.7%. The market's signal is clear: financial conditions are tightening autonomously. The market now believes that at next month's policy meeting, the Fed's dilemma is no longer "how much to cut rates" but whether it needs to consider raising rates again. Economists at Goldman Sachs have pushed back their expectation for the next rate cut to December 2026, with a second cut delayed to March 2027, both adjustments being 25 basis points. Meanwhile, the yield at a recent 30-year Treasury auction reached its highest level since August 2007, reflecting a scenario where long-term supply pressures and inflation concerns are reinforcing each other. As the new Fed Chair takes office, the economic environment he faces is markedly different from his predecessor's, characterized by energy prices pushing CPI toward 4%. Currently, the market is pricing in a nearly 40% probability of a rate hike before December. Japan's 30-Year Government Bond Yield Breaks Above 4% for First Time, Accelerating Exit from Deflation Era The shift in Japan's bond market carries profound implications for global asset pricing. On Friday, Japan's 30-year government bond yield surpassed 4% for the first time, while the 40-year yield rose to 4.23%, both setting new record highs. The 20-year yield also climbed to its highest level since 1996. Japan, long accustomed to a zero-interest-rate environment, is accelerating its exit from the deflationary era. Although Japan's Finance Minister reiterated that there is no immediate need for a supplementary budget, market concerns about fiscal discipline have clearly intensified. More critically, the persistent depreciation of the yen is forcing the market to price in expectations for a Bank of Japan rate hike. A senior economist at Natixis pointed out that Japan is caught in a vicious cycle: the yen is being sold as a funding currency, imported inflation pressures are forcing the central bank to hike rates, and rate hike expectations are further pushing up yields. Japan's corporate goods price index in April recorded its largest year-on-year increase in 12 years, reflecting the ongoing impact of geopolitical conflicts on global supply chains. A strategist at SMBC Nikko Securities stated that for a Japan long trapped in deflation, the 30-year yield breaking above 4% is of historic significance, suggesting that inflation may be taking real root in the country. UK Gilts and Political Risk: A Double Blow to a Fragile Market Amid the global bond sell-off, UK assets faced even more severe pressure. The British pound recorded its largest weekly decline since January 2025 this week, while the 30-year Gilt yield surpassed 5.8% on May 12, reaching its highest level in nearly three decades. Political instability amplified the pressure from rising global interest rates. The market attributed the additional decline to the pricing in of a "Burnham premium." The Mayor of Manchester announced his intention to return to Parliament and challenge the current Prime Minister. Investors are concerned that a more left-leaning leader might implement looser fiscal policies, potentially increasing bond supply. An interest rate strategist at TD Securities noted that the path to a by-election is becoming clear faster than expected, suggesting that selling momentum could persist. The market's core concern is that widening fiscal deficits and increased long-term government bond supply will further push up borrowing costs. The severe volatility in UK markets indicates that under the combined pressures of high inflation, high interest rates, and fiscal uncertainty, investors' tolerance for policy credibility is significantly diminishing. Inflation Resurgence, Rate Cuts Elusive, Markets Sound the Alarm Behind this global sell-off, a clear macro narrative is emerging: energy shocks are reigniting inflation, forcing central banks worldwide to reassess previous easing expectations. Meanwhile, with global stock markets at historic highs, the head of thematic investing at Goldman Sachs warned, "Sustained higher interest rates are a major problem for equities." Market focus is now shifting to the Federal Reserve's policy signals next week and NVIDIA's earnings report. An analyst at Nomura cautioned that the "gamma release" following Friday's options expiration could open a window for a market reversal next week. Regardless of the direction, investors must remain alert to one fact: when the world's safest assets—government bonds—are undergoing systematic repricing, the valuation logic for risk assets cannot remain insulated.
Comments