Not seen since 2007, the U.S. Treasury market is sounding the alarm

Author: Zhao Ying

Source: Wall Street Sights

The U.S. Treasury market is facing its most severe stress test in nearly two decades. Hit by a triple shock of escalating tensions in the Middle East, oil prices breaking through the $100 mark, and resurgent inflation expectations, Treasury yields have climbed across the board to multi-year highs. The 30-year bond yield has recorded its longest consecutive stretch at elevated levels since 2007, causing a sharp shift in market expectations for the Fed's policy path.

On Thursday, the 10-year U.S. Treasury yield rose 4 basis points to 4.71%, reaching its highest level since January 2025. The 30-year yield climbed to 5.19%, with its consecutive time above 5% exceeding any period since 2007. Meanwhile, Brent crude oil futures surged 7% in a single day, breaking through the $100 per barrel mark, as markets focused on the escalating conflict in the Middle East and reports of an attack on a tanker off the Saudi coast.

The rising yields quickly transmitted to financing costs for U.S. entities. The 10-year Treasury is a key benchmark for mortgage and corporate loan pricing. The average rate on a 30-year fixed-rate mortgage in the U.S. has risen to 6.58% this week, a high for the year. The stock market also came under pressure, with the Dow Jones Industrial Average falling nearly 1% on Thursday, the S&P 500 dropping 1.2%, and the Nasdaq Composite declining 2.15%.

Goldman Sachs’ trading desk previously identified the 10-year Treasury yield at 4.7%, WTI crude oil at $90, the VIX index at 20, and the S&P 500’s 50-day moving average as key psychological thresholds. Currently, the 10-year yield has already touched 4.7%. Nomura strategist Charlie McElligott believes that the rates market is preemptively trading on other investors' expectations of policy and expressing discontent that a "hawkish hold" is insufficient.

30-Year Yield Holds Above 5%, Longest Streak Since 2007

The core of the current volatility in the Treasury market is the increased stickiness of long-end yields above 5%.

According to Dow Jones Market Data, the 30-year Treasury yield had been above 5% for 11 consecutive trading days as of Tuesday, and on Wednesday it further extended the longest streak above that level since 2007. On Thursday, the 30-year yield continued to rise to 5.19%.

This level itself is not a “red line” that automatically triggers a market crisis. Market participants generally view 5% more as an integer level that attracts attention, not one that would force the U.S. to stop funding in the open market immediately. Bond prices move inversely to yields. Persistently higher yields mean investors are demanding greater compensation for risks such as inflation eroding returns, expanding fiscal financing needs, and an increased supply of long-term bonds.

Dustin Reid, Chief Fixed Income Strategist at Mackenzie Investments, pointed out that for long-duration bonds, the "biggest enemy" is inflation. "If inflation is going to remain high for a long time, investors need to be compensated accordingly."

Notably, unlike 2023 and earlier this year, once the 30-year yield touches 5% in this cycle, it is not quickly falling back. Alexander Payne, who oversees mortgages, agency debt, and volatility at Vanguard, said there is no single "trigger" for this sell-off, but neither is there a strong "buy-the-dip" mentality. He believes that given the massive U.S. fiscal deficit and the historic spending expected for AI infrastructure, "there will be many opportunities to buy long-duration debt at higher yields."

Oil Shock Reignites Inflation Expectations, Rate Hike Bets Surge

Brent crude oil breaking through $100 per barrel is the direct catalyst for the current bond market turmoil.

The U.S.-Iran conflict, which erupted in late February this year, has continuously pressured energy markets. In June, oil prices retreated and inflation data cooled following a ceasefire agreement between the U.S. and Iran, but the fragile peace in the Middle East quickly unraveled, causing Brent crude to rebound sharply from its lows. Hamad Hussain, Climate and Commodities Economist at Capital Economics, stated, "Unless there are clear signs of de-escalation in conflicts across the region, the upside risk to oil prices remains significant."

Before the oil price spike, institutions like Goldman Sachs and UBS expected the Fed to keep rates unchanged this year. However, the market is now repricing for a more hawkish policy path. According to CME FedWatch data, the probability of a rate hike at the next Fed policy meeting implied by traders has risen to 36%. Polymarket data shows that bets on a rate hike occurring in 2026 have climbed to 71%.

Nomura equity derivatives analyst Charlie McElligott warned in a Thursday note that the rates market is essentially trying to "front-run the front-runners" and may be experiencing a "miniature market temper tantrum," indicating that "a hawkish hold is not enough anymore." He further argued that the oil shock suggests higher rate volatility, which will force central banks to reprice their hawkish stance, ultimately leading to a broad tightening of cross-asset volatility.

Goldman Sachs' trading desk highlighted key psychological levels for the market: the S&P 500's 50-day moving average (7462 points), the 10-year yield at 4.7% (last seen in January 2025), WTI crude oil at $90, and the VIX volatility index at 20. McElligott also warned that seasonal patterns for the VIX are about to "take off" in August, a period typically characterized by low liquidity and low risk tolerance.

Fiscal Financing and AI Bond Supply Add Pressure on Long-End

Oil prices are not the only reason for rising Treasury yields. Fiscal deficits, Treasury supply and demand dynamics, and increased corporate long-term bond issuance are collectively altering the supply-demand balance for long-end bonds.

The continuous deterioration of the U.S. fiscal situation adds another layer of concern to the bond market. Defense Secretary Pete Hegseth estimated in Congressional testimony on Tuesday 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 funding to support the escalating conflict. Meanwhile, the U.S. national debt has reached $39.6 trillion, nearly five times the $8.35 trillion in 2007, and the debt-to-GDP ratio surpassed 100% earlier this spring.

At the same time, the participation of foreign buyers in the U.S. Treasury market has declined compared to past decades. Brij Khurana, Fixed Income Portfolio Manager at Wellington Management, noted that the presence of foreign buyers in the U.S. Treasury market has been steadily diminishing for decades, even as U.S. debt approaches $40 trillion and issuance needs grow. He believes a "handover" from foreign buyers to domestic holders is necessary, but domestic investors "may only be willing to take [Treasuries] when the stock market is falling."

The bond market also faces structural supply pressure from the corporate side. Citing BondCliQ data, MarketWatch reports that the combined outstanding bond face value of six tech giants—Microsoft, Amazon, Google parent Alphabet, Nvidia, Meta, and Oracle—in 2026 is close to $500 billion. The AI capital expenditure arms race is providing bond investors with a large number of alternatives to 30-year Treasuries, further diverting demand away from U.S. government bonds.

Furthermore, market dynamics are also influenced by speculation regarding the policy stance of the new Fed Chair, Kevin Warsh. Warsh has pledged to push for central bank reforms and establish a special working group to review communication mechanisms, the inflation framework, and balance sheet policy. Tom Tzitzouris, Head of Fixed Income Research at Baird Strategas, stated, "The biggest driver right now might just be the Warsh story and how he is going to function as Fed Chair."

Rising Rates Begin to Test Stock Valuations and Housing Finance

Rising Treasury yields are rippling from the bond market into the U.S. stock market and real estate sector.

In previous weeks, the stock market had reacted relatively calmly to rising oil prices. Michael Kantrowitz, Chief Investment Strategist at Piper Sandler, believes the stock market could show resilience with the 10-year yield around 4.65% and oil around $87, partly because short-term realized volatility remained low and corporate earnings expectations continued to be revised upward.

However, with oil surging to $100 and the 10-year yield breaking above 4.7%, this equilibrium is starting to break down. Higher yields increase corporate financing costs and compress valuation multiples for high-priced assets. The weakness in tech stocks on Thursday, pulling the Nasdaq Composite lower, shows the market's growing sensitivity to rising interest rates and capital expenditure.

The housing market is also facing direct impact. The rate on the U.S. 30-year fixed mortgage has climbed to 6.58%, near a one-year high. Higher mortgage rates typically dampen refinancing activity and increase the monthly payment burden for homebuyers.

Mackenzie Investments' Reid warned that if the 30-year yield hits 5.25%, the Treasury Department will start to get uncomfortable. "They don't want the long end of the yield curve to spiral out of control, because that would certainly pose a risk to equities and valuations." JPMorgan Chase CEO Jamie Dimon also recently stated publicly that he would not buy long-term U.S. government bonds at current prices, warning that the deficit issue "is going to be a problem" and that the "bond vigilantes" will return.