What could possibly prevent a bond market crash?
2026-09-25 01:50:12
Currently, the bond market has become the core area of focus for Wall Street investors, which is entirely reasonable. U.S. Treasury yields have climbed to levels not seen in many years, driven by strong economic data, rising oil prices, and persistent inflation expectations, prompting traders to repric the possibility of further interest rate hikes by the Federal Reserve. 
This week, the market has broken through several key psychological levels: The 10-year Treasury yield hit a high of 5.15% on Thursday, the highest level since 2007; it surged more than 15 basis points on Wednesday, marking the largest single-day increase since April 2025. The 30-year Treasury yield rose to 5.442%, the highest since 2004. The 2-year Treasury yield reached a high of 4.947% on Wednesday, the first time since 2023. Since 2026, the 10-year yield has generally shown a steep upward trend, forming a clear "peak" pattern. These sharp fluctuations have significantly dragged down the stock market. The Nasdaq Composite Index fell 1% on Wednesday, and the S&P 500 and Dow Jones Industrial Average were also under pressure. On Thursday morning, the stock market continued to be under pressure, showing the direct crowding-out effect of rising yields on risk assets. Historically, when the 10-year US Treasury yield has been consistently above 5%, stock market valuations often face compression pressure, especially for interest rate-sensitive growth stocks and highly valued technology sectors. So, what factors could curb the continued rise in yields? Senior investment strategist Ed Yardeni suggests two potential catalysts. He points out, "A easing rebound in bond prices might require a resolution to the Middle East war, thereby lowering oil prices. Another possibility is that US Treasury Secretary Scott Bessent takes action to lower bond yields by repurchasing more Treasury bonds and issuing more short-term Treasury bills," Yardeni Research president wrote Wednesday evening. Indeed, President Trump stated on Tuesday that he believes the US will reach an agreement with Iran after the November midterm elections to end the war. Meanwhile, the US Treasury will conduct another $6 billion in Treasury bond repurchase operations on Thursday. However, the scale of repurchases so far, relative to the average daily trading volume of $1.2 trillion in Treasury bonds, has had a muted market reaction and has failed to effectively reverse the upward trend in yields. More importantly, if repurchase operations continue to expand in scale and are combined with debt maturity management strategies, they are expected to change the supply and demand structure in the medium to long term, thereby having a substantial impact on the yield curve. Yardeni further emphasized that the main reason for Wednesday's sharp rise in yields was the latest S&P Global data indicating that "the US economy is booming." In other words, the rise in yields was partly due to positive factors—the economy's resilience exceeded expectations. From a macro perspective, strong employment, consumption, and manufacturing data reduced the risk of recession, but at the same time reinforced expectations of "higher and longer" interest rates, forming a typical "good news is bad news" market reaction pattern. In the short term, if yields continue to remain at their current multi-year highs or even rise further, the stock market may still be under pressure. Investors need to closely monitor inflation data, oil price trends, and the latest statements from Federal Reserve officials. In addition, global capital flows are also worth noting: high-yielding US Treasuries are attracting international capital inflows, which may exacerbate the pressure on emerging market currencies to depreciate and the risk of capital outflows. For allocation-oriented investors, it may be appropriate to moderately increase the allocation of short-duration bonds and high-quality credit bonds at this time, while maintaining flexible adjustments to equity positions. In summary, the sharp fluctuations in the bond market are not only a direct reflection of interest rate expectations, but also the result of the intertwining of economic cycles, geopolitics, and policy responses. In the coming weeks, developments in the Middle East and the Treasury’s debt management operations will be key variables in determining whether yields can stabilize and decline.
This week, the market has broken through several key psychological levels: The 10-year Treasury yield hit a high of 5.15% on Thursday, the highest level since 2007; it surged more than 15 basis points on Wednesday, marking the largest single-day increase since April 2025. The 30-year Treasury yield rose to 5.442%, the highest since 2004. The 2-year Treasury yield reached a high of 4.947% on Wednesday, the first time since 2023. Since 2026, the 10-year yield has generally shown a steep upward trend, forming a clear "peak" pattern. These sharp fluctuations have significantly dragged down the stock market. The Nasdaq Composite Index fell 1% on Wednesday, and the S&P 500 and Dow Jones Industrial Average were also under pressure. On Thursday morning, the stock market continued to be under pressure, showing the direct crowding-out effect of rising yields on risk assets. Historically, when the 10-year US Treasury yield has been consistently above 5%, stock market valuations often face compression pressure, especially for interest rate-sensitive growth stocks and highly valued technology sectors. So, what factors could curb the continued rise in yields? Senior investment strategist Ed Yardeni suggests two potential catalysts. He points out, "A easing rebound in bond prices might require a resolution to the Middle East war, thereby lowering oil prices. Another possibility is that US Treasury Secretary Scott Bessent takes action to lower bond yields by repurchasing more Treasury bonds and issuing more short-term Treasury bills," Yardeni Research president wrote Wednesday evening. Indeed, President Trump stated on Tuesday that he believes the US will reach an agreement with Iran after the November midterm elections to end the war. Meanwhile, the US Treasury will conduct another $6 billion in Treasury bond repurchase operations on Thursday. However, the scale of repurchases so far, relative to the average daily trading volume of $1.2 trillion in Treasury bonds, has had a muted market reaction and has failed to effectively reverse the upward trend in yields. More importantly, if repurchase operations continue to expand in scale and are combined with debt maturity management strategies, they are expected to change the supply and demand structure in the medium to long term, thereby having a substantial impact on the yield curve. Yardeni further emphasized that the main reason for Wednesday's sharp rise in yields was the latest S&P Global data indicating that "the US economy is booming." In other words, the rise in yields was partly due to positive factors—the economy's resilience exceeded expectations. From a macro perspective, strong employment, consumption, and manufacturing data reduced the risk of recession, but at the same time reinforced expectations of "higher and longer" interest rates, forming a typical "good news is bad news" market reaction pattern. In the short term, if yields continue to remain at their current multi-year highs or even rise further, the stock market may still be under pressure. Investors need to closely monitor inflation data, oil price trends, and the latest statements from Federal Reserve officials. In addition, global capital flows are also worth noting: high-yielding US Treasuries are attracting international capital inflows, which may exacerbate the pressure on emerging market currencies to depreciate and the risk of capital outflows. For allocation-oriented investors, it may be appropriate to moderately increase the allocation of short-duration bonds and high-quality credit bonds at this time, while maintaining flexible adjustments to equity positions. In summary, the sharp fluctuations in the bond market are not only a direct reflection of interest rate expectations, but also the result of the intertwining of economic cycles, geopolitics, and policy responses. In the coming weeks, developments in the Middle East and the Treasury’s debt management operations will be key variables in determining whether yields can stabilize and decline.
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