Alarm Bells Ringing in the U.S. Treasury Market for the First Time Since 2007

Amid a triple whammy of fiscal deficits, a surge in AI bond supply, and a retreat of overseas buyers, JPMorgan CEO Jamie Dimon bluntly stated that the "debt market vigilantes" will make a comeback.

Written by: Zhao Ying, Wall Street Insights

The U.S. Treasury market is facing the most severe stress test in nearly two decades. Due to the escalating situation in the Middle East, oil prices surpassing $100, and a resurgence of inflation expectations, U.S. Treasury yields have surged to multi-year highs, with the 30-year Treasury yield setting a record for the longest continuous high since 2007, sharply altering market perceptions of the Federal Reserve's policy path.

On Thursday, the yield on the 10-year U.S. Treasury rose by 4 basis points to 4.71%, reaching its highest level since January 2025. The 30-year yield climbed to 5.19%, remaining above 5% longer than any period since 2007. Meanwhile, Brent crude oil futures skyrocketed by 7% in a single day, surpassing $100 per barrel, as the market focused on the escalating conflict in the Middle East and reports of attacks on tankers near Saudi shores.

The rapid rise in yields is quickly translating into higher financing costs for U.S. entities. The 10-year Treasury serves as a crucial pricing benchmark for mortgage and corporate loans, with the average rate for 30-year fixed mortgages in the U.S. rising to 6.58% this week, a nearly one-year high. U.S. stocks are also under pressure, with the Dow Jones Industrial Average dropping nearly 1% on Thursday, the S&P 500 down 1.2%, and the Nasdaq Composite falling 2.15%.

Goldman Sachs' trading desk previously identified key psychological thresholds: a 10-year Treasury yield of 4.7%, WTI crude at $90, a VIX index of 20 points, and the S&P 500's 50-day moving average. Currently, the 10-year yield has reached 4.7%. Nomura Securities analyst Charlie McElligott believes that the interest rate market is preemptively trading other investors' expectations of policy and expressing dissatisfaction with the "hawkish hold."

30-Year Yield Stabilizes Above 5%, Setting Record for Longest Duration Since 2007

The core of the current volatility in the U.S. Treasury market is the increasing stickiness of long-term yields above 5%.

According to Dow Jones market data, the 30-year Treasury yield had previously been above 5% for 11 consecutive trading days as of Tuesday, further breaking the record for the longest continuous period above 5% since 2007 on Wednesday. On Thursday, the 30-year yield continued to rise to 5.19%.

This range itself does not automatically trigger a market crisis. Market participants generally believe that 5% is more of a round number that draws attention rather than a threshold that would force the U.S. to immediately halt public market financing. Bond prices move inversely to yields. A sustained rise in yields means that investors are demanding higher returns to compensate for risks such as inflation eroding returns, expanded fiscal financing, and increased long-term bond supply.

Dustin Reid, Chief Fixed Income Strategist at Mackenzie Investments, pointed out that for long-duration bonds, "the biggest enemy" is inflation. "If inflation remains high for a long time, investors will need to receive appropriate compensation."

Notably, unlike in 2023 and earlier this year, once the 30-year yield touches 5%, it has been difficult to quickly retreat. Alexander Payne, head of mortgage, institutional debt, and volatility business at Vanguard, stated that this round of selling does not have a single "trigger," but there are no signs of a rapid "buying the dip" mentality in the market. He believes that given the U.S.'s massive fiscal deficit and the historic spending expectations for AI infrastructure, "there will be many opportunities to buy long-duration debt at higher yields."

Oil Price Shock Reignites Inflation Expectations, Rate Hike Bets Surge

Brent crude surpassing $100 per barrel is a direct trigger for the current turmoil in the bond market.

The U.S.-Iran conflict, which erupted in late February, has continued to pressure the energy market. Previously, in June, oil prices had temporarily retreated following a ceasefire agreement between the U.S. and Iran, and inflation data had cooled somewhat, but the fragile peace in the Middle East quickly collapsed, and Brent crude has rebounded significantly from its lows. Hamad Hussain, a climate and commodities economist at Capital Economics, stated, "Unless there are clear signs of de-escalation in conflicts worldwide, the risks of rising oil prices remain significant."

Before the oil price surge, institutions like Goldman Sachs and UBS had expected the Federal Reserve to maintain interest rates unchanged this year. However, the market has begun to reprice for a more hawkish policy path. According to CME FedWatch data, traders are betting that the probability of a rate hike at the next policy meeting has risen to 36%. Polymarket data shows that bets on a rate hike occurring in 2026 have surged to 71%.

Nomura Securities equity derivatives analyst Charlie McElligott warned in a report on Thursday that the interest rate market is actually trying to "predict the predictors" and may be staging a "mini market tantrum," indicating that "the hawkish hold is no longer sufficient." He further noted that the oil shock suggests higher interest rate volatility, which will force central banks to reprice their hawkish stance, ultimately leading to a tightening of cross-asset volatility.

Goldman Sachs' trading desk has also alerted the market to several key psychological thresholds: the S&P 500's 50-day moving average (7462 points), the 10-year yield at 4.7% (last touched in January 2025), WTI crude at $90, and the VIX volatility index at the 20-point mark. McElligott also warned that the seasonal pattern of the VIX is about to "take off" in August, a month characterized by low liquidity and low risk tolerance.

Fiscal Financing and AI Bond Supply Increase Pressure on Long-Duration Bonds

Oil prices are not the only reason for the rise in U.S. Treasury yields. Fiscal deficits, the supply and demand of government bonds, and increased corporate long-term debt issuance are collectively altering the supply-demand balance for long-duration bonds.

The ongoing deterioration of the U.S. fiscal situation adds another layer of concern to the bond market. Defense Secretary Pete Hegseth testified in Congress on Tuesday, estimating that the U.S.-Iran war has cost $37.5 billion so far, and the Trump administration is requesting an additional $67 billion in supplemental appropriations to support the escalating conflict. Meanwhile, the U.S. national debt has reached $39.6 trillion, nearly five times the $8.35 trillion in August 2007, and the debt-to-GDP ratio surpassed 100% this spring.

At the same time, the participation of overseas buyers in the U.S. Treasury market has declined compared to previous decades. Brij Khurana, a fixed income portfolio manager at Wellington Management, pointed out that foreign buyers have been steadily losing their presence in the U.S. Treasury market over the past few decades, despite the U.S. debt nearing $40 trillion and issuance demand continuing to rise. He believes that a "relay" from foreign buyers to domestic holders is needed, but domestic investors are "only willing to step in when the stock market declines."

The bond market also faces structural supply pressures from the corporate side. According to MarketWatch, citing BondCliQ data, the six tech giants—Microsoft, Amazon, Alphabet (Google's parent company), Nvidia, Meta, and Oracle—have nearly $500 billion in outstanding bonds maturing in 2026, and the AI capital expenditure arms race is providing bond investors with numerous alternatives to the 30-year Treasury, further diverting demand away from U.S. Treasuries.

Additionally, the bond market's trajectory is compounded by market speculation regarding the policy direction of the new Federal Reserve Chair, Christopher Waller. Waller has committed to pushing for central bank reforms and has established a special task force to review communication mechanisms, inflation frameworks, and balance sheet policies. Tom Tzitzouris, head of fixed income research at Baird Strategas, stated, "The biggest driver right now may be Waller's narrative and how he will fulfill his role as Fed Chair."

Rising Interest Rates Begin to Test Stock Valuations and Housing Financing

The rise in U.S. Treasury yields is spreading from the bond market to the U.S. stock and real estate markets.

In the previous weeks, U.S. stocks reacted relatively restrained to rising oil prices. Piper Sandler's chief investment strategist, Michael Kantrowitz, believes that the stock market has been able to maintain resilience when the 10-year Treasury yield is around 4.65% and oil prices are about $87, partly because short-term volatility remains low and corporate earnings expectations continue to be revised upward.

However, as oil prices rise to $100 and the 10-year yield surpasses 4.7%, this balance is beginning to come under pressure. Rising yields will increase corporate financing costs and compress the valuation space for overvalued assets. On Thursday, tech stocks weakened, pushing the Nasdaq Composite's decline further, indicating that the market's sensitivity to rising interest rates and capital expenditures is increasing.

The housing market is also facing direct impacts. The average rate for 30-year fixed mortgages in the U.S. has risen to 6.58%, nearing a one-year high. Higher mortgage rates typically weaken refinancing activity and increase the monthly repayment burden for homebuyers.

Reid from Mackenzie Investments warned that if the 30-year yield reaches 5.25%, the Treasury will begin to feel uneasy. "They do not want the long end of the yield curve to spiral out of control, as that would certainly pose risks to the stock market and valuations." JPMorgan CEO Jamie Dimon recently also publicly stated that he would not buy long-term U.S. Treasuries at current prices and warned that the deficit issue "will become a problem," at which point the "debt market vigilantes" will re-emerge.