The US bond market is grappling with significant pressure, underscored by US Treasury Secretary Scott Bessent’s recent attempts to stabilise yields through bond-buying operations, which appear to have faltered. President Donald Trump weighed in, hinting at various forms of intervention, including the military, suggesting that US power ultimately underpins the bond market. This context is acutely relevant given ongoing geopolitical tensions, particularly in Iran, which has seen the Strait of Hormuz closed for months. Such closures disrupt global oil flows, contributing to Brent crude prices hitting US$94 ($131) a barrel, keeping the US 30-year Treasury yield near a 19-year high of 5.3 per cent.
While geopolitical strife is a factor, commodity strategist Jeffrey Currie points to more nuanced inflationary pressures. Currie contends that “crack spreads”—the cost of transforming crude oil into refined products like diesel and petrol—are the critical concern, not merely crude prices. These spreads hit US$102 last week, four to six times typical levels, driven by a refining shortage. This deficit is attributed to Ukrainian strikes on Russian plants, Iranian actions in the Middle East, and chronic underinvestment. Higher diesel prices are now seeping into food prices, with corn rising 10 per cent recently, and threaten to impact trucking, food, and producer prices across the board as every container ship, tractor, and mining truck relies on diesel.
Bank of America strategist Michael Hartnett warns that if the 30-year yield breaks the 5 per cent “Maginot Line,” it risks a US credit event and could jeopardise the AI spending boom crucial to American economic growth. Should Bessent fail to keep yields below this threshold, Hartnett suggests shorting the US dollar, highly leveraged AI plays, private credit, and financial stocks. Meanwhile, Société Générale strategist Albert Edwards notes that while rising yields will strain financial systems, he doesn’t foresee this alone ending the AI-driven equity bull market. However, Edwards cautions that elevated investor optimism and high valuations, especially against rising bond yields, create significant vulnerability to “bad” news and lay the groundwork for a potential market “accident.”
