The US bond market is grappling with persistent volatility, with the 30-year Treasury yield stubbornly close to 5.3 per cent, a near 19-year high. US Treasury Secretary Scott Bessent’s enlarged bond-buying operation has struggled to pull yields down. President Donald Trump weighed in on intervention, stating, “The ultimate intervention is our military. And if we have to use that, we will.” Rabobank’s chief strategist Michael Every interprets this as a reminder that national power underpins market dynamics, particularly amidst ongoing geopolitical tensions in regions like Iran.
Elevated energy prices are a primary driver behind these rising bond yields. Brent crude has recently hit $US94 ($131) a barrel, partly due to the prolonged closure of the Strait of Hormuz. Commodity strategist Jeffrey Currie warns against focusing solely on crude, instead highlighting alarmingly high “crack spreads” – the difference between crude and refined fuels. These spreads recently hit $US102, four to six times normal levels, signalling a severe global refining shortage. This deficit, stemming from Ukrainian strikes and Iranian attacks coupled with underinvestment, pushes up diesel prices that consequently inflate food and commodity costs.
Bank of America strategist Michael Hartnett underscores the critical importance of keeping the 30-year yield below 5 per cent, a “Maginot Line” crucial to averting a US credit event and sustaining the artificial intelligence (AI) spending boom that supports economic growth. Should Bessent fail, Hartnett suggests investors consider shorting the US dollar, highly leveraged AI plays, private credit, and financial stocks. While Société Générale strategist Albert Edwards does not foresee rising yields alone ending the AI-driven equity bull market, he cautions that extreme investor optimism and high valuations make equities vulnerable to adverse news, indicating ingredients for a market “accident” are gathering.
