Rate Hike Warning

Source: Wall Street Intelligence Circle

The world's most important "underlying pricing system" in global finance has started to experience dramatic turbulence.

Many ordinary investors may feel that the bond market is far removed from them, but in reality, bond yields act as the "master switch" for the prices of all global assets. Now, this master switch is being turned to an increasingly dangerous position.

The 30-year US Treasury yield has already surpassed 5%, and the 10-year US Treasury yield is also approaching 4.6%—a level sufficient to shake market confidence. Morningstar multi-asset strategist Dominic Pappalardo even believes that it would not be surprising to see the 10-year US Treasury yield rise to 5%.

The sudden collapse in the bond market was triggered by the market's realization that the expected rate cuts might not happen, or could even turn into rate hikes again—to curb inflationary pressures brought on by energy shocks from the Iran war. Currency market data shows that traders now assign a 60% chance to a US Federal Reserve rate hike this year. Before the outbreak of the war, the market was betting on at least two rate cuts. This is the most brutal aspect of financial markets: expectations can turn 180 degrees in an instant, and the bond market is often the first to react.

The forces driving yields higher are very strong, while the factors that could push yields down are currently not apparent.

First, rising oil prices are causing inflation to surge again. US crude oil closed this week at $105, returning to the highs since the Iran war.

Second, the new Federal Reserve Chair may not intervene to rescue the market.

Third, the US fiscal situation is entering a "negative feedback loop." The more the US borrows, the more the market demands higher interest; the higher the interest rates, the more the US has to borrow. It's like a net that is constantly tightening.

In the coming weeks, market volatility will increase significantly. Especially if the 10-year Treasury approaches 5%, oil prices keep climbing, or Nvidia's earnings report is not explosive enough—the market might truly and for the first time begin to shift from "AI faith" to "interest rate panic." Once this switch occurs, the volatility could be much greater than many people expect.