For those of you who would prefer to listen:
The Bond Market is back in intimidation mode. The Bond Vigilantes are riding again. They’re pushing hard on the sticky inflation and mountains of debt. It’s never clear when the Bond Market is going to reassert its authority on the financial system. But when it does, it’s impactful. Stocks usually stand back. The Bond Market is the ultimate smart money. It’s the responsible adult asset class. It’s also the alpha dog on Wall Street. This won’t be the most interesting piece I write. But it’s amongst the most important ones. The Bond Market matters. It matters a lot.
Yields have jumped of late. That means interest rates are higher. Interest rates are the price of money. It’s gotten more expensive to borrow. The 10-Year Treasury yield is the benchmark for most loans. It hit 4.7% this week. That’s the highest on the year. The 30-Year Treasury yield is at a multi-decade high. It cleared 5% and has stayed above it for 14 consecutive days. It’s been above it for 29 days and counting in 2026. The last time this happened was 2007.
Despite it being Earnings Season, it was Geopolitics that grabbed investor attention this week. 13 straight days of military activity in the Persian Gulf since the ceasefire stopped shows an end to the conflict is nowhere near. What an end even looks like is far from clear. The barometer there is the price of Oil. WTI went back above $90. Brent Crude cleared $100. Both are up over 30% in just a matter of weeks. Higher Oil prices have triggered the higher yields. There has been a strong correlation between the 2. It’s showing no sign of breaking. The conflict with Iran will mark 5 months next week.
We’ve been puzzled all along as to why Oil prices fell in June despite no concrete evidence that any positive resolution to the conflict was in reach. The Market has been so complacent when it comes to the geopolitical risks. Many of those risks have been realized. The Strait of Hormuz is all but closed again. The Islamic Revolutionary Guard, which is clearly calling the shots in Tehran, is fixated on controlling the strait and charging tolls. In response, Oil and other distillates were rerouted via pipelines to ships in the Red Sea. That provided a lift in supplies and declines to Oil prices; Until it didn’t. The Red Sea had become a viable alternative, until this week. Iranian-backed Houthi rebels attacked Saudi ships. There’s now a blockade at the Bab el-Mandeb Strait, which is at the southern tip of the Red Sea, between Yemen and Ethiopia. On average, 5 Million barrels travel through this strait daily. Now those are at risk. What’s more, 2 cargo ships were attacked in the Black Sea, caught in the middle of the Russian-Ukrainian war. The risks and costs of shipping keep rising throughout the region, which directly impacts the rest of the world.
Gas prices are up 42% this year. It doesn’t stop there. The price of rice is up 42% in 2026. Wheat is up 37% and Tomatoes are up 31%. This is not just a U.S. issue. It’s a global issue. Natural Gas prices are up 59% in Europe and 94% in Asia. Bond yields have risen throughout Europe and Asia in response to the inflationary pressures.
The Fed meets again next week. They’re pretty much stuck. The Market is assigning a 36% probability of a rate hike. We aren’t buying it. We don’t see them doing anything at the meeting, despite the sticky inflation. The tricky part is that this inflation is not being driven by an overheating Economy. It’s largely coming from the geopolitical issues overseas curbing supplies which has sent prices soaring. The Fed can’t do anything about that.
Another driver of these higher yields is the mountain of Federal debt with no plans in Congress to pay it off. America’s debt obligation is on track to hit $40 Trillion later this year, with another $2 Trillion of deficit spending. Our debt-to-GDP is over 100%. The Treasury Department auctioned off $13 Billion worth of 20-year bonds this week. It’s the Market that determines the price as buyers set the bid. The bonds sold at a 5.16% yield, the highest level of the year. Higher yields mean lower prices as bonds have inverse relationships with the 2. It’s simple math really. The big problem, in addition to the lower price the government received, was this auction drew fewer bids than average. Primary dealers were stuck with 15% of the total. Foreign buyers were less interested. Technically, America is not a AAA credit. You may recall, our nation lost its last AAA rating, from Moody’s, in May. The thing is, America doesn’t have a credit problem. America has a spending problem. The Bond Market is hyper-focused on that.
It’s not just governments that are issuing debt. Corporate America, and increasingly Tech companies, have increased their borrowing. The Tech Titans have turned to the Bond Market to help finance their AI initiatives. Silicon Valley has long self-financed its growth, carrying little debt. Google has both issued debt and sold more stock in a secondary offering to help finance its expenditures. This week it increased its intended spend for the year. The company is now expected to be cash flow negative for the first time in over a decade. The cost to fuel the AI growth keeps rising. It makes it harder to get a return on investments. The Market is a little anxious about that. We expect to hear more on this subject next week when Apple, Microsoft and Amazon report earnings.
These geopolitical issues don’t just impact Oil prices. They impact Global commerce and the price of money. They impact Corporate leaders and decision-making. They impact government officials. And it’s absolutely impacting the American people and voters, ahead of the November elections. The Market is paying attention to all of it. It’s not liking what it’s seeing. There doesn’t seem to be much in the way of a visible resolution at play. So, keep those belts buckled. Smooth air still looks a ways away.
Fortunately, both Oil and yields declined a bit on Friday. That provided a bit of a reprieve for stocks and bonds. Rumors circulated that more diplomacy was in the works. That said, another round of peace talks isn’t instilling confidence for a better ultimate outcome. In the interim, investors have high prices to contend with. Stocks have had trouble the last few years every time the 10-year clears 4.5%. Home prices have too. Mortgage rates have moved back towards 7%. Money is expensive. That generally leads to lower prices for assets.
Bottom line: We view this as healthy, corrective price action. Besides, the S&P is less than 3% from its all-time high. Tech needed to correct. If you’d like to explore this topic further, we covered it in detail in our recent quarterly newsletter. The skyward moves were unsustainable. Corrections come in both time and price. Another important factor: Money is staying in the Market. It just keeps moving between the growthiest areas and those that are more defensive. Also key: Corporate Bond spreads are behaving. They remain tight to Treasuries. That’s really important. It indicates very little concern about credit risks. The Market is showing few signs of any crises in credit. It’s inflation and the rising debt that has it on guard. Expect this issue to continue to overhang price action. Those Bond Vigilantes are doing important work. It’s typical Summer Market behavior. It’s just no fun.
We will learn a lot next week when the other Tech Titans report earnings and the Fed updates us on what it plans to do with interest rates. It will all be Market-moving.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
