Bonds experienced significant volatility this past week, as yields worldwide surged to their highest levels in decades. Bond market volatility surged at its quickest rate in several months. Investors are expressing concern that the current turbulence may extend its effects into the stock market. The bond market’s “fear gauge,” which tracks expected volatility, surged 19% this week. That represents the most significant one-week increase since March, and the second-largest since April 2025, when President Donald Trump’s “Liberation Day” tariffs disrupted global markets. Investors are capable of adjusting to a gradual increase in yields; however, abrupt surges present greater challenges to accommodate. As bond market volatility increases, it prompts apprehensions regarding the potential ripple effects, particularly concerning the influence on equities. Bond yields had been on a consistent upward trajectory this year before experiencing a significant spike on Wednesday, driven by robust economic data, assertive remarks from a prominent Federal Reserve official, and a lacklustre bond auction. Yields continued their upward trajectory on Thursday. The 30-year Treasury yield reached a peak of 5.53% on Friday, marking its highest point since 2004. Japan’s 10-year yield has reached its highest level since 1996. Bond yields increase as prices decrease. Add in volatile global oil prices trading over $100 per barrel, and it can stir up more uncertainty for investors. “Oil – to use a bad analogy – is throwing gasoline on the inflationary environment, and that’s what has investors worried,” Gennadiy Goldberg told. “That’s what has the Fed worried as well.”
The 10-year Treasury yield this week reached its peak level since 2007. The key yield establishes the borrowing costs throughout the economy. As the yield increases, it elevates the expense associated with mortgages, auto loans, and various other consumer loans. On Thursday, the average 30-year fixed mortgage rate exceeded 7%, marking its highest point in nearly two years. Oil prices continue to be a significant influence on both bonds and stocks. Seven months into the conflict with Iran, the global oil price has surpassed $100 per barrel, reflecting an increase of over 60% since the beginning of the year. This surge is generating significant ripple effects throughout the economy and financial markets. Brent crude exhibited significant volatility this week, yet it has increased by 15% this month. This rise has heightened traders’ expectations for central banks to implement further interest rate hikes to mitigate inflation, consequently driving up bond yields. The correlation between oil prices and the 10-year Treasury yield has reached its highest level in 35 years this week, as reported by data from Cboe Global Markets. “The longer higher oil prices persist, the more likely inflation spreads to other portions of the economy,” said Mike O’Rourke. “That is prompting the Federal Reserve to raise interest rates, which is pressuring bonds.” A decline in oil prices may alleviate pressure on bonds, with traders closely observing developments in the Middle East to assess the likelihood of ongoing disruptions to oil flows.
A prolonged surge in oil prices, so severe that it raises concerns about an economic slowdown, could lead investors to seek refuge in the safety of bonds. Currently, economic indicators are robust, oil prices remain high, and interest rates are increasing. “The historically strong correlation between oil and yields will leave the market particularly focused on the durability of the latest diplomatic efforts in the Middle East,” Ian Lyngen wrote. Investors are closely monitoring the effects of the turmoil in the bond market on stock performance. The S&P 500 has experienced a decline of less than 1% since reaching a record high five weeks prior. However, there exists underlying distress within the market dynamics. Among the 11 sectors within the S&P 500, only technology, communication services, and healthcare have registered gains this month, with healthcare experiencing a modest increase of merely 0.1%. The remaining eight sectors are experiencing losses, with the utilities sector, particularly vulnerable to rising interest rates, leading the decline with a drop exceeding 6%. The S&P 500 is weighted by market capitalisation, resulting in larger firms within the technology sector exerting a more significant impact on the index. The S&P 500 equal-weight index, which assigns equal weight to each stock, has experienced a decline of over 5% since reaching its peak in August. The increase in oil prices and interest rates is generating challenges for certain sectors of the equity market, such as utilities and consumer discretionary. “It’s been driving parts of the market, most notably the consumer-facing market,” Jonathan Krinsky stated.
In the last eight trading sessions, a greater number of stocks within the S&P 500 have reached a 52-week low compared to those that have achieved 52-week highs. Oil and rates are impacting the stock market, albeit “not quite on the surface of the S&P 500,” Krinsky noted. “The AI story has been kind of holding up the S&P,” Krinsky added. The S&P 500 has experienced a 13% increase this year, contributing an additional $8 trillion to its market value. The tech and communication services sectors have contributed approximately $6.3 trillion to that market value increase, as noted by O’Rourke. “The ‘Yes, No, Maybe So’ jawboning over the Strait of Hormuz reopening keeps investors on edge,” Craig Johnson wrote in a note, adding that rising bond yields hurt stock valuations and put pressure on small and mid-cap stocks, real estate, utilities and “other rate-sensitive groups.” The prolonged uncertainty surrounding the Strait of Hormuz, coupled with the ongoing rise in bond yields, may exert increasing pressure on the stock market. “Oil has … been in the driver’s seat for both stocks and bonds,” Ohsung Kwon wrote in a note earlier this week.
