Is the Bond Market Rout the End of Days?

In 1964's Goldfinger, James Bond asks: "Do you expect me to talk?" The villain, Auric Goldfinger, responds: "No, Mr. Bond, I expect you to die!" The way the US bond market has behaved since August has raised questions with few answers, leaving investors to ask the inevitable: Is this the end of days, at least on Wall Street? A never-ending spike in Treasury yields certainly makes us engage in existential thought, including how many days we have left before a calamity.

Feeling High in the Bond Market

Anyone paying attention to the financial markets is uninterested in the tech-heavy Nasdaq Composite Index hitting an all-time high or the broad-market S&P 500 flirting with a record high. Bitcoin reclaiming $85,000 is not nearly as exciting as it would have been a couple of years ago. A strengthening greenback is good enough for a smirk.

Instead, the world is watching the global bond market, particularly US Treasury securities. While yields on US government debt have been inching higher since the start of the war in Iran in late February, they have skyrocketed over the last eight weeks, touching levels unseen in years or even decades.

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The primary ten-year Treasury yield, which influences a broad array of business, consumer, and government borrowing costs, climbed to the highest level since 2007. The 30-year Treasury bond yield is the highest in more than 20 years. The two-year note, a yardstick for Federal Reserve policy expectations, is hovering around 4.8%, the highest since 2024.

Given today's headlines, outsiders might think only the US bond market is experiencing enormous volatility – and they would be wrong. All over advanced economies, yields are surging, from Japan to Europe to Australia. Eyebrows have been raised across the equities arena, while fixed-income investors have been smiling from ear to ear.

Ultimately, the question is why. Is it the war? Is it capital competition from the artificial intelligence (AI) hyperscalers? Is it all about the Fed? The bond market is screaming about something. International intrigue, indeed!

Goodbye QE, We Hardly Knew Ye

Twenty years ago, the Global Financial Crisis was beginning to unfold. The housing market crashed, the banking system neared collapse, and a Great Recession loomed. To prevent a calamity, central banks intervened by unleashing quantitative easing, an experimental initiative consisting of asset purchases and ultra-low interest rates.

A new era of easy money and cheap credit was born. Even before the pandemic, interest rates were tepid, with the ten-year yield between 1.5% and 3%. Of course, the once-in-a-century public health crisis brought interest rates even lower. As the old song goes, the times they are a-changin'.

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In recent years, government bond yields have been gradually creeping higher, beginning with the "In Liz We Truss" period and the gilts a few years ago. The bond market then shifted to Big Trouble in Little Tokyo as the Bank of Japan ended its stranglehold on government bonds and let yields rise. In the world’s largest economy, a mix of an Iranian conflict and a new sheriff at the Federal Reserve drove Treasury yields higher.

This past summer, Fed Chairman Kevin Warsh presented a message to Wall Street: He is done holding your hand and will not bail you out with balance-sheet expansion. Instead, he will simply bail out Treasury Secretary Scott Bessent by expanding its T-bill holdings! Still, that is neither here nor there.

In other words, armchair traders and institutional investors are watching interest rates normalize. For businesses and consumers, it is an ugly affair. For politicians, it will add to the federal budget. For investors, it is another money-making opportunity. Put simply, America is reliving the 1990s, a decade of technological revolution, a booming stock market, and high interest rates.

Will Something Break?

Logic dictates that if a guaranteed investment offers a high return, it will adversely affect riskier assets that may or may not generate a similar profit. So, if the ten-year Treasury yield is offering 5% and leading benchmark averages are potentially exhausting the bull market, why gamble on a stock? It might seem counterintuitive, but this generally does not happen, at least according to recent Goldman Sachs research. The ‘90s are one example.

Still, the real worry is whether Treasury yields keep climbing. In this case, the average American will hope they fly too close to the sun and then come crashing down. But this might only happen if President Donald Trump ends the war in Iran or an AI bubble pops.