Bond Yields Surge to Fresh Peaks: Seven Catalysts Behind the Rally

The Treasury market appears intent on testing the limits for riskier investments. US long-dated yields have surged since breaching the significant 5% level, but this has not yet dented equity markets or gold. Eventually, this dynamic is expected to shift as higher yields vie with stocks for investor funds.

On Tuesday, the yield on the 10-year Treasury increased by 8 basis points to 5.35%, just shy of the post-financial crisis peak reached Monday. Meanwhile, the 30-year bond yield climbed 7.4 basis points to 5.72%, marking its highest level in 24 years. A move above 6% for long-term bonds would likely pressure certain areas of the economy, particularly the already struggling housing sector.

Borrowing costs saw a temporary dip over the last ten days after softer non-farm payrolls data and a weak S&P Global services PMI. While this has reduced expectations for further Fed rate hikes, it has not halted the bond selloff. The situation has become so severe that Treasury Secretary Scott Bessent was forced to retract his earlier boast, 'I'm the house, bet against me if you want.'

Higher borrowing costs ripple through the entire economy, and it is becoming apparent that a macroeconomic shift is required to halt the trend.

1. Extreme AI capital expenditure is absorbing available funds. On Tuesday, SpaceX committed another $40 billion to Nvidia chips.
2. The US fiscal situation remains far from sustainable, with no credible Congressional advocates pushing for reform.
3. Donald Trump's proposal for $5,000 checks remains alive, and such rhetoric undermines any future efforts towards fiscal discipline, instead encouraging the opposite.
4. US military interventions come with a high price tag.
5. The conflicts in Iran and Ukraine are expensive stalemates that will keep inflation elevated until they are resolved.
6. The Federal Reserve seems intent on doing only the bare minimum to combat inflation, a strategy that could leave it behind the curve.
7. Investors may view artificial intelligence as fiscally and politically destabilizing, unleashing a host of expensive social welfare needs and disruption.

The final factor is particularly alarming because there is no way to reverse it. The recent push to slow AI has seemingly been abandoned, and society is moving full speed ahead into an AI-driven future, with governments likely to foot the bill in some form.