The bond market is flashing warnings signs

Long-term bond yields allow us to gauge how investors feel about the economy—and right now, they’re not exactly painting a reassuring picture.

Bonds are getting hit with a serious selloff: The 30-year Treasury yield touched 5.339% today, its highest level since 2007. You don’t need to be a credit expert to know that when anything is being compared to 2007, it’s not a compliment. Meanwhile, the 10-year Treasury yield hit 4.75% today, a level it hasn’t reached in 19 months.

The bond carnage is going global, too. Borrowing costs in France, Germany, Japan, and the UK are all reaching multi-year highs, with some hitting the highest levels in decades.

Yielding some bad news

Fears of reigniting inflation are partly to blame for the mass selling (remember, bond yields rise as bond prices fall). As conflict in the Middle East intensifies once again, oil prices are rising, which investors are wagering will kick off another round of price acceleration.

The short-term fears are also bringing long-standing concerns to the surface, including skepticism about the growing government deficit: The Congressional Budget Office predicts that the US budget deficit this fiscal year will be $200 billion larger than previously expected. There’s also been a surge of new corporate debt issued by hyperscalers to fund their AI buildouts, which investors may prefer over Treasurys, diminishing demand for government notes.

Even the good news isn’t good enough to stop the bond market mayhem. Recent macro data, including a cool inflation report and surprisingly bad jobs numbers last week, suggested the Fed may not hike rates in September, which should have driven yields lower. Instead, the selloff has only accelerated over the last few days as investors fret about what tomorrow’s FOMC meeting minutes will reveal about Kevin Warsh’s plans for interest rates.

What does this mean for stocks?

While equities have defied hurdle after hurdle over the past year, the boring old bond market might be what finally breaks up the party.

Higher yields tend to be a bane for stocks for a few reasons. The yields investors can earn from reliable fixed income can tempt them to take money out of stocks and put it into bonds. Higher bond yields can also hike the cost of loans, making it harder for regular people to borrow for cars or homes, and raise expenses for businesses—particularly in growth sectors like tech, where higher borrowing costs can be extremely detrimental.

Yet even as stocks sold off today, many investors are clinging to the one thing that’s powered the market higher through turbulence over the past six months: earnings.

“Despite higher long-term yields and a more fragile U.S. fiscal situation, equity investors are largely ignoring the issue for now,” explained Ameriprise Chief Market Strategist Anthony Saglimbene in a note. “That’s because S&P 500 earnings expectations continue to reflect a very strong profit backdrop.”

And yet: The bond vigilantes taking over the market may not allow themselves to be ignored for much longer.—LB