Written by: Xu Chao, Wall Street Insights

The U.S. Treasury bond market is transmitting increasingly strong pressure signals to other asset classes, with the stock market being the most affected.

Long-term U.S. Treasury yields skyrocketed last week, with the 30-year Treasury yield reaching its highest level since 2007, and the 10-year Treasury yield also breaking out of the trading range it maintained since the end of 2023.

Meanwhile, the ICE Bank of America MOVE Index, which measures expected volatility in the U.S. Treasury market, surged to its highest point since May, with demand for put options betting on falling bond prices skyrocketing. Data from the Chicago Board Options Exchange shows that the skew of one-month put options linked to the iShares 20+ Year Treasury Bond ETF has surged to its highest level since the 2008 financial crisis.

In the coming week, details of the U.S. Treasury financing plan will be disclosed, followed by the release of the July non-farm payroll report, which could further intensify the turbulence in the bond market.

Bob Elliott of Unlimited Funds recently wrote in a commentary: “It is hard to judge how much longer other asset markets like stocks can sustain at the current interest rates without being dragged down.” Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities, also warned that the uncertainty surrounding Federal Reserve policy guidance, combined with multiple geopolitical noises, makes the market quite precarious.

Federal Reserve Credibility Questioned, Long Bond Yields Break Higher

The core driver of this round of rising Treasury yields is the market's skepticism about the Federal Reserve's policy credibility.

Since Kevin Warsh became chair of the Federal Reserve, his stance on inflation has been firm, but the inflation rate has remained above the Fed's 2% target for five consecutive years, leading investors to begin doubting whether the Fed truly has the willingness to raise rates again.

Last Wednesday, there was a rare divide in the Federal Reserve’s rate-setting committee—three regional Fed presidents voted for a rate hike, opposing the majority of the committee. When Warsh concluded last week’s press conference, long bond yields suddenly jumped, while short bond yields fell simultaneously, leading to a dramatic narrowing of the spread between the two. Analysis of Dow Jones market data shows this is the largest “Fed meeting day” yield curve compression since 2023.

Goldberg from TD Securities stated: “The market is questioning how committed the Federal Reserve is to controlling inflation.” He also pointed out that under the baseline scenario, there will be no rate hikes in the next two years, but the probability of a rate hike has “significantly increased.”

Volatility in the Bond Market Rises, Hedging Demand Expands Sharply

The unusual movements in yields quickly transmitted to the derivatives market, significantly heating up hedging demand.

The ICE Bank of America MOVE Index hit a high not seen since May, indicating that traders are actively hedging against the risk of further rate increases.

Meanwhile, the ratio of put option trading volume relative to call options linked to the iShares 20+ Year Treasury Bond ETF (TLT) has clearly increased, and analysts at the Chicago Board Options Exchange pointed out that the skew of one-month TLT put options has soared to its highest level since the 2008 financial crisis.

Of particular concern is the divergence between the recent rise in long-end yields and declining oil prices—while oil prices fell, they did not rise in tandem with yields, further weakening the correlation between yields and oil prices and exacerbating market uncertainty.

Overflows Anticipated, Stock Market Risks Increase

Turbulence in the Treasury bond market has historically been a precursor to stock market risks, and the current situation similarly leaves equity market investors feeling anxious.

Bob Elliott pointed out in his commentary that each time Treasury yields reach or approach the current levels, pressures tend to start spreading to other markets, with the stock market being the first to be dragged down. Currently, the 30-year Treasury yield has reached 5.239%, and the 10-year yield stands at 4.693%, both in the historical high range.

Goldberg also admitted that the geopolitical uncertainties brought about by the situation in Iran, the ambiguity of Federal Reserve policy guidance, and other multiple market noises have collectively created a fragile market environment. “Various uncertainties are intertwined,” he said.

Multiple Event Windows Approaching, Key Week of Testing Ahead

The next week will be a crucial window to determine whether the current pressure in the Treasury market can spread.

Later this week, the U.S. Treasury will unveil details of the latest government financing plan, and any unexpected content could trigger a new round of volatility in the bond market. Additionally, several important economic data points will be released throughout the week, culminating with the July non-farm payroll report on Friday, which will significantly impact market expectations regarding the direction of Federal Reserve policy.

Meanwhile, last week, the U.S. Treasury and Federal Reserve coordinated with Japanese authorities in a historic intervention to stabilize the continuously declining yen. Analysts believe that the U.S. joining the intervention was partly motivated by preventing another outbreak of volatility in the Treasury market.

The $30 trillion U.S. Treasury market is the cornerstone of the global financial system, serving both as a key collateral for short-term institutional liquidity and a benchmark pricing anchor for trillions of dollars in global debt. This “sleeping giant” once it continues to stir, its tremors will resonate far beyond the bond market itself.