The Bond Market Pain Isn't Over | Weekly Roundup

The bond market’s selloff remains the central pain trade: the 10-year Treasury closed at 5.22%, and ZB fell almost 10 full points in roughly two and a half months, even though rate cuts had been priced in earlier. Speakers said bonds and short-term interest-rate markets are unlikely to turn bullish without a material change in conditions. Rate expectations have swung from three-quarters of a point in cuts to three-quarters of a point in hikes, and then to four hikes; the SOFR curve was pricing more hikes than the Fed’s projections the previous week. One speaker expects hot PCE inflation over the next two months and further bear steepening.

The speakers differed on how far yields might rise before markets or the economy buckle. DCP said the 30-year yield may need to reach 6% and the front end 5%–5.5% to make markets nervous. Another speaker said the economy could handle a 10-year yield of 5.75%–6% and a 30-year yield of 6.25% or higher, though the transition could be disruptive. A rollover in crack spreads, material equity weakness, slower AI capital spending, or a Fed signal that rate hikes are over could shift sentiment; DCP considered that Fed signal unlikely. Speakers also warned that the path and volatility of rising yields may matter more to risk assets than the eventual level.

Fiscal pressure and issuance are adding to the strain. Treasury liquidity buybacks targeted $6 billion but totaled $4 billion, which one speaker said added fuel to the selloff; that speaker doubted Treasury intervention alone could reverse the market, contrasting a hypothetical $10 billion purchase with half a trillion dollars of issuance. The same speaker projected a $50 trillion deficit by year-end, possibly $1 trillion higher. Another said markets are pricing an increasingly unsustainable fiscal position, with both parties potentially favoring more spending under a split Congress. Government borrowing is also competing with a glut of private issuance that is already pushing spreads higher.

Higher yields and diesel costs are tightening financial conditions, while the Fed cannot stop a runaway 30-year yield or resolve an energy supply shock. A further 25-basis-point hike would be small beside the tightening already embedded in long-term yields and diesel prices, one speaker said; hikes might limit some inflation pass-through but would not fix an oil supply problem. DCP expects the lower half of the K to be squeezed over the next six to nine months as higher diesel costs pass through to food service, retail, Amazon, and other transport-dependent businesses. He cited diesel at $9 a gallon in California and $7 in Chicago, and said his school-catering business was paying twice as much for beef as two years earlier.

AI investment is another source of pressure, described by DCP as an ongoing inflationary force and by David Cervantes as an “inflationary expansion of all assets.” Speakers pointed to cash concentrating in AI and warned that private-credit or private-equity problems, financing for AI capital spending, regional banks, commercial real estate, or Treasury issuance could become stress channels. KRE was at, and possibly breaking through, its 200-day moving average, but one speaker reported no clear stress in repo or swap markets and said the Treasury General Account balance was decent. The economy was described as still booming, though less comfortable than before. Small businesses face higher financing costs than cash-rich companies such as Apple: SBA 7(a) working-capital loans are capped at $200,000 with rates of 12%–13%, while SBA 504 loans of $2 million–$3 million were described as being in the mid-6% range. The speaker expects more small-company bankruptcies and restructurings, particularly among firms in the $1 million–$20 million range.

Market positioning and price levels offer no confirmed reversal signal. ZB open interest and volume peaked going into the FOMC and then declined before volume later spiked to its highest level. One speaker said ZB needs to hold 103; a break below 103–103.12 could raise the chance of a move to par. The MOVE index reached 104, below its March high of 111, and a higher high might be needed to signal a bond reversal. The trader would consider going long if rates markets overshot, especially by fading hikes priced into SOFR contracts farther out in 2027–28, but would not own those contracts at current levels. They said SOFR pricing moves in quarter-point increments and can overshoot the next increment by about 8–12 basis points, making pricing four hikes plus another half hike increasingly speculative.

Equity performance also reflects sharp concentration: a Goldman chart showed more than 50% of S&P 500 constituents moving with negative beta to the index, while the equal-weight S&P measure was about 6% below its highs and the Mag7 were at all-time highs. Speakers said headline growth and profits can look strong while many other companies struggle, as Mag7 investment and AI-company valuation markups boost the figures. Nike, PayPal, Wendy’s, and Trade Desk were cited as relatively good companies at multi-year lows, many tied to consumers or food service rather than AI. They were not forecasting a crash, and one speaker noted that a 20% correction might not return markets to the March lows. They also saw room for a policy mistake if the Fed hikes repeatedly just as an AI-related downturn hits; more dominoes would need to fall before markets shifted toward renewed QE and rate cuts.