Bond Yields Are Rising, Giving Investors the Yips. Keep an Eye on These Levels

Former President Donald Trump ended the week with renewed threats on trade, unsettling markets by suggesting tariffs on Apple Inc. and the European Union. While this reignited tensions around global commerce, investors were more fixated on developments in the bond market—particularly the sudden spike in long-term Treasury yields, which could have broad implications for stocks and the broader economy.

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The most notable movement came from the 30-year Treasury yield, which rose significantly during the week. On Thursday, it briefly touched 5.15%, nearing its peak from October 2023 before retreating slightly. It ultimately closed Friday at 5.036%, a weekly jump of 14.1 basis points and a gain of nearly 30 basis points over the past month. Because bond yields and prices move in opposite directions, rising yields often signal investor anxiety or shifting expectations for inflation and fiscal policy.

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Meanwhile, equity markets struggled. The S&P 500 ended a six-day rally earlier in the week and declined over four consecutive sessions, resulting in a 2.6% weekly drop—its worst since early April. The Dow Jones Industrial Average also fell 2.5% for the week. Investors grew concerned that surging yields could dampen enthusiasm for equities and other riskier assets.

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This rise in yields has been linked to uncertainty surrounding a tax and spending bill supported by Trump, dubbed the “big, beautiful bill.” Passed narrowly by just one vote, the bill is expected to further swell the federal deficit, an issue already under the spotlight after credit-rating agency Moody’s downgraded the U.S. from its last remaining triple-A rating. Moody’s cited long-term fiscal challenges and rising interest expenses as key factors behind the downgrade.

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Investor sentiment was further shaken by a lackluster 20-year Treasury bond auction midweek, which raised concerns about demand for U.S. debt amid expanding supply. The result was a surge in Treasury yields that spilled into the equity market, dragging major stock indexes lower.

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Giuseppe Sette, co-founder and president of AI-based market research firm Reflexivity, warned that investors should be concerned about the long-term fiscal impact of the new legislation. He suggested that markets might be reaching a tipping point, where investors could reawaken the so-called bond vigilantes—those who exert pressure on governments by demanding higher yields in response to fiscal irresponsibility.

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Sette noted that with long-term bonds now offering yields around 5% in a relatively low-inflation environment, investors could be re-evaluating their asset allocations. Some might shift from equities to higher-yielding fixed income, while others might move to cash to avoid risk altogether. Either way, this spells potential trouble for equities and riskier markets like commodities, cryptocurrencies, and emerging-market currencies.

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The 10-year Treasury yield also rose, briefly exceeding 4.60%—its highest level since February—before settling at 4.508% on Friday. It gained 7.1 basis points over the week and has risen more than 24 basis points in the past month.

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Larry Adam, chief investment officer at Raymond James, pointed out that when the 10-year yield rises above 4.5%, it tends to dampen investor sentiment. He also noted that this yield level typically aligns with a 7% 30-year mortgage rate, which could put pressure on the housing market and slow broader economic activity.

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High yields also tend to depress stock valuations, as rising interest rates weigh on price-to-earnings ratios. Adam warned that a climb toward 4.75% on the 10-year could be especially troubling for equities, particularly given the likelihood that consensus earnings forecasts may be revised lower.

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Economists are growing increasingly uneasy about the rise in real (inflation-adjusted) long-term yields, especially since it’s occurring even as expectations for economic growth decline. Jens Nordvig, founder of Exante Data, observed that this contrasts with previous yield spikes driven by strong growth or fears of Fed tightening. The implication is that bond investors may be increasingly skeptical of the U.S.’s fiscal direction and the political will to correct course.

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Notably, this rise in long-term yields isn’t isolated to the United States. Japanese long-term bond yields also surged, indicating that concerns about fiscal complacency and duration risk are going global.

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Stephen Innes, managing partner at SPI Asset Management, summed up the mood by saying that the world is now witnessing a real-time repricing of fiscal risk. He emphasized that the long-standing harmony between stocks and interest rates appears to be breaking down.

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By the week’s close, both U.S. and Japanese yields had retreated from their highs, easing some tension. Yet for many investors, the spike was a wake-up call, signaling growing unease even if it didn’t yet rise to crisis levels.

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Technical analyst Mark Arbeter of Arbeter Investments remarked that despite the attention paid to the 30-year yield, it’s the 10-year yield that usually matters more for the economy. He speculated that the 30-year drew interest because it crossed the 5% threshold before the 10-year did.

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Arbeter added that unless the 30-year yield decisively breaks above its October 2023 high of 5.15%, it’s not yet a technical breakout. If it were to move beyond that, yields could rise significantly—possibly into the 6% range—which would also likely lift 10-year yields further. Still, he emphasized that the impact on stocks depends not just on how high yields go, but how quickly they get there.

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“If yields climb slowly and steadily, markets can adapt,” Arbeter said. “But if we wake up one day and yields have spiked by 20 or 30 basis points, that’s when trouble begins.”

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